Oil surges 6% as US-Iran strikes reignite inflation fears

The resumption of US-Iran hostilities sent Brent crude 6% higher to $78 a barrel and revived market fears that rising energy costs will force the Federal Reserve to reverse course and hike interest rates.

"The flare-up of fighting with Iran rekindles market concern that rising oil prices will stoke inflation and force the Federal Reserve to hike interest rates," Ed Yardeni, president of Yardeni Research, said on Bloomberg Television's Surveillance.

The US military struck more than 80 targets in southern Iran early Wednesday, including air defense systems, coastal radar sites and anti-ship missile capabilities, after Iran attacked commercial vessels in the Strait of Hormuz. Iran's Islamic Revolutionary Guard Corps responded by targeting 85 US military installations in Bahrain and Kuwait, according to state media. European stocks fell 1.6% while the dollar strengthened and government bond yields climbed as investors priced in the risk of renewed inflation.

The escalation threatens to unravel the 60-day memorandum of understanding signed June 17, which had halted hostilities and reopened the Strait of Hormuz — a chokepoint handling about 21% of global oil trade. President Donald Trump told reporters at the NATO summit in Ankara on Wednesday he considers the ceasefire "over," though he said negotiators could keep talking.

Brent crude had fallen back to about $73 a barrel — roughly pre-war levels — after the interim peace deal last month, down from above $120 following the outbreak of war on Feb. 28. The latest strikes have erased more than half of those gains in a single session. The national average for regular gasoline stood at $3.79 a gallon on July 7, down 41.3 cents from May but still 62.7 cents higher than a year earlier, according to AAA.

The last time the US and Iran engaged in tit-for-tat strikes during active peace talks was in April, when both sides initially agreed to ceasefire negotiations. That round of escalation pushed Brent above $90 a barrel before tensions eased. The current crisis carries greater risk given Trump's public dismissal of the diplomatic track.

Rate Path in Question

Before the latest escalation, markets had been pricing in a steady Fed hold through year-end after the central bank kept rates at 5.25% to 5.5% since July 2023. The oil price spike introduces a supply-side shock that complicates the inflation outlook, potentially forcing the Fed to weigh rate hikes just as the economy shows signs of cooling. Yardeni's warning reflects a growing concern among strategists that energy-driven inflation could delay or reverse monetary easing.

Energy Sector Diverges

Oil producers and refiners stand to benefit from the price surge. Shell raised its integrated gas production outlook for the second quarter, with trading results expected to be "significantly higher" than in the first three months of the year, the company said in an update. Brent crude, jet fuel and gas prices rocketed after the war started Feb. 28, boosting refining margins and trading revenue across the sector. Shell's Pearl GTL site in Qatar, however, has remained offline since being hit during earlier attacks.

For investors, the question is whether this escalation represents a temporary spike or the start of a prolonged conflict that keeps oil above $80 a barrel. If the MoU collapses entirely and the Strait of Hormuz closes again, Brent could retest $120, reigniting inflation and forcing a hawkish Fed pivot. If diplomacy holds, the oil risk premium could fade as quickly as it appeared.

This article is for informational purposes only and does not constitute investment advice.