Oil Hits Three-Week High as U.S.-Iran Peace Hopes Fade

Oil prices climbed to their highest level in nearly three weeks on Tuesday as the breakdown in U.S.-Iran peace efforts renewed concerns over prolonged disruptions to crude supplies from the Middle East.

Brent crude oil, against which Nigerian crude oil is priced, rose 35 cents to $91.22 per barrel after touching $91.48 earlier in the session, while U.S. West Texas Intermediate crude gained 81 cents to $85.31 per barrel, according to Reuters.

The latest advance extends a rally driven increasingly by geopolitical risk as investors reassess the likelihood that diplomatic efforts will bring an end to hostilities between Washington and Tehran.

Expectations for an agreement weakened after the United States ruled out extending the existing ceasefire arrangement, while Iran indicated it was prepared to adopt a more aggressive military posture if diplomatic efforts failed.

The deterioration in relations has renewed concerns about the security of energy shipments through the Strait of Hormuz, one of the world’s most important routes for crude oil and liquefied natural gas.

Shipping through the waterway remains substantially below normal levels despite a modest improvement in vessel movements.

Preliminary shipping data showed crossings remained in single digits on Monday as the continuing U.S.-Iran standoff discouraged normal commercial traffic through the strait.

Security concerns increased further on Tuesday after a vessel travelling out of Hormuz was struck by an unidentified projectile, damaging its engine room and resulting in a crew casualty.

The remaining crew received assistance from the Omani Coast Guard, according to the United Kingdom Maritime Trade Operations.

Major Middle Eastern producers are also adapting their supply operations to the disruption.

Saudi Aramco has begun offering some Asian refiners crude that can be loaded outside Hormuz, reducing exposure to the increasingly risky shipping route.

The continued disruption is encouraging traders to consider the possibility that constraints on Middle Eastern oil flows could persist considerably longer than initially expected.

Reuters analysis noted that crude flows through Hormuz have fallen sharply from pre-crisis levels, while alternative export routes have limited capacity to replace volumes normally transported through the waterway.

The impact is spreading beyond crude markets.

Rising oil prices have increased concerns that elevated energy costs could keep global inflation higher for longer, contributing to a selloff in government bonds and pressure on equity markets on Tuesday.

The U.S. 30-year Treasury yield climbed to its highest level in nearly two decades as investors responded to renewed inflation risks associated with the Middle East conflict.

The immediate direction of crude prices is likely to remain closely tied to developments between the United States and Iran and the ability of producers to maintain exports despite restrictions around Hormuz.

A diplomatic breakthrough could remove part of the geopolitical premium currently supporting prices, while further attacks on shipping or energy infrastructure could deepen supply concerns and extend oil’s recent rally.