Oil prices increased by 5% following three consecutive days of declines, as hostilities reignited in the Middle East, concluding a period of relative tranquillity and rekindling worries about possible interruptions to energy supplies. The action was prompted by a report from the U.S. military indicating that it had intercepted an Iranian “surprise attack” on its forces, leading to retaliatory strikes against the Islamic Republic. Brent crude surged 5% to approximately $88 a barrel, rebounding following its most significant three-day drop since April 2020. The U.S. West Texas Intermediate crude advanced $.67, or .47%, to $83. The escalation has once again placed the Strait of Hormuz at the forefront of investor focus. Any disruption to oil supplies could exacerbate inflationary pressures just days ahead of the Federal Reserve’s rate decision on Wednesday. Markets are currently experiencing uncertainty as investors retreat from technology stocks, fuelled by increasing scepticism regarding the potential returns on substantial investments in artificial intelligence.

Oil prices have experienced significant volatility amid the U.S.-Israeli conflict in Iran, which has led to disruptions in global crude flows. The effective closure of the Strait of Hormuz has further exacerbated these concerns. Earlier this week, U.S. President Donald Trump concluded a two-week bombing campaign over the weekend and stated on Fox News on Tuesday that there had been “good talks” with Iran. He also cautioned that the U.S. might execute additional strikes should negotiations falter. Iran has dismissed the notion that it is aiming to reinitiate discussions with Washington. The trajectory of oil prices will be significantly influenced by the duration of the disruption. JPMorgan’s analysis suggests that each additional month of supply disruption may contribute approximately $7 to $8 per barrel increase in Brent prices. A three-month disruption could elevate monthly average Brent prices to approximately $114 per barrel.

Goldman Sachs has similarly cautioned that Brent may reach $120 a barrel if shipping disruptions through the Strait of Hormuz, the preeminent oil transit route globally, persist. Its base case remains that tensions in the Middle East will ultimately subside. Under that scenario, Goldman Sachs anticipates that Brent will average $80 a barrel in the fourth quarter and $75 in the following year. However, the bank indicated that the risks to those forecasts remain “tilted to the upside,” highlighting the potential for ongoing shipping disruptions through both the Strait of Hormuz and the Red Sea. Anindya Banerjee, said geopolitical developments were once again driving crude oil prices. “Any strike on major Gulf export infrastructure could force a retest of $95-100 and beyond,” he said.

According to Banerjee, the market has redirected its attention from the military action to the diminishing prospects of a diplomatic resolution. Tehran has established new prerequisites for the resumption of negotiations, he stated, as ongoing developments have postponed the restoration of regular tanker traffic through the Strait of Hormuz. Shipping activity through the waterway continues to lag significantly behind pre-war levels. Despite the significant decline observed on Tuesday, crude prices continue to be approximately 30% elevated for the month. Tanker traffic through the Strait of Hormuz remains significantly below typical levels, maintaining the underlying supply risk even as immediate price pressures have eased.