Oil prices climb as Iran tensions deepen

Oil prices surged on Wednesday amidst escalating tensions with Iran, as the likelihood of an Iran war settlement faded, prompting concerns over supplies passing through the strategic Strait of Hormuz. Brent crude futures surged by 26 cents to $91.28 a barrel in early trading, marking a fourth consecutive day of gains, while US West Texas Intermediate crude rose 37 cents to $85.31.

Brent had previously settled at $91.02 on Tuesday, its highest close in over three weeks. The latest increase came after the expiry of a temporary ceasefire agreement between the U.S. and Iran on Monday, without a comprehensive deal to end the conflict that has disrupted Middle Eastern energy flows. Iran signaled its armed forces would adopt a "fully offensive" stance following diplomatic efforts' failure to reach a permanent settlement.

U.S. President Donald Trump dismissed extending the expired arrangement and stated no talks or negotiations with Tehran were ongoing or scheduled. Iran, however, insisted it remains open to negotiations under acceptable terms, rejecting demands it considers as surrender. The impasse has heightened uncertainty surrounding the Strait of Hormuz, a crucial energy transit route, with conflicting claims from Washington and Tehran over its status.

The conflicting statements have become a central issue for crude markets, as Gulf producers rely heavily on Hormuz to reach global buyers. The situation has intensified security risks around commercial shipping, with recent missile firings and a bulk carrier being struck near the waterway. Iranian officials have warned that Tehran may intensify military actions if diplomatic efforts fail and linked their hardened military posture to what they see as persistent U.S. pressure.

Shipping companies and energy traders have reassessed routes and insurance costs in response to the threat of further attacks. Oil markets have already absorbed a significant geopolitical premium during the conflict, with Brent prices reaching $126 a barrel, about 75% above pre-war levels, before falling as diplomatic initiatives raised hopes of improved oil movements through Hormuz.

However, those hopes waned, sending the benchmark back above $90. Producers and buyers are now seeking alternatives to reduce exposure to the strait. Iraq has approved mechanisms to facilitate exports via alternative arrangements, with new contracts set to begin from September 1. Chinese shipping companies have started rerouting some oil shipments to avoid Hormuz and the Bab al-Mandeb passage.

Meanwhile, Saudi energy shipments have benefitted from offshore transfer operations that allow crude to reach buyers without relying on conventional movements through the most exposed parts of the Gulf. While these measures can alleviate pressure at the margins, they cannot fully replace the large volumes typically transported through Hormuz.

Supply signals outside the Middle East provided limited relief, with preliminary U.S. inventory figures showing declines in crude and distillate stocks alongside an increase in petrol inventories. Markets awaited official data indicating whether crude inventories fell by about 600,000 barrels in the week ending August 14. The energy shock is also spreading beyond commodity markets, as elevated fuel costs could keep inflation pressures high. Long-term government borrowing costs have risen across several major economies.