Global oil hits $107 per barrel and bond yields surge

Oil prices surged Thursday, with Brent crude hitting $107 per barrel for the first time since May, as traders brace for a more prolonged supply shock caused by the Iran war. Oil prices have climbed back above the $100 per barrel mark this week as fighting in the Straight of Hormuz and Red Sea has intensified. The US and Iran have traded strikes, while the Iran-backed Houthis have attacked Saudi Arabia and ignited tensions in the Bab al-Mandab Strait. Brent crude, the global oil benchmark, rose 6.1% and traded at $107.40 per barrel. US crude rose 6.2% and hit $102 per barrel for the first time since May. Resurgent conflict has stoked concerns of further disruptions to global oil supplies and the flow of crude through the Strait of Hormuz. “The step up in attacks in the Strait of Hormuz and by the Houthis against Saudi Arabia suggests that Iran and its proxies are trying to regain the initiative in the war,” Jason Tuvey, deputy chief emerging markets economist at Capital Economics, said in a note. “This could set back the recovery in oil output in the Gulf and raises the risk that global energy prices rise even further in the coming weeks,” Tuvey said. Oil surge at odds with Trump’s vision For the first time since the war started, S&P Global Energy said Thursday it does not expect Middle East oil production to return to pre-war levels by the end of next year. The firm no longer assumes a definitive end to the war nor a return to normal in the Strait of Hormuz by the end of 2027. S&P now expects oil prices to stay high – in the $80 to $100 a barrel range – through next year. By contrast, President Donald Trump on Wednesday night promised a speedy return of cheap energy. “Prices right after this very important election on November 3rd will be plummeting,” Trump said. “The war will be over very shortly after the election.” Jim Burkhard, global head of crude oil research at S&P Global Energy, said the market is “not returning to calm.” “It is adjusting to the new normal defined by unresolved conflict and persistent Maritime risk,” Burkhard said in the report. Bond market turmoil The rise in oil prices has added to nerves about inflation and central bank rate hikes, sending ripples through bonds and stocks. The bond market sell-off intensified on Thursday, with the key 10-year Treasury yield surging nine basis points to 4.92%, its highest level since October 2023. Bond yields have surged despite the Treasury Department on Wednesday announcing it would buy back up to $6 billion bonds on Thursday, a move that could ease pressure on yields. Some investors weren’t satisfied with the scale of the announcement, while others contend that government buybacks aren’t enough to change the trajectory of bond yields, which have surged this year on concerns about higher energy prices and central bank rate hikes. “Treasury is figuratively shooting a BB gun at an elephant,” Mike O’Rourke, chief market strategist at JonesTrading, said in a note. The surge in oil prices and bond yields Thursday morning came as new data showed headline wholesale inflation picked up in August. Traders are pricing in a 72% chance that the Federal Reserve raises interest rates at its policy meeting next week, up from a 61% chance on Wednesday and a 49% chance one week ago, according to CME FedWatch. Stocks were lower Thursday, with the major US indexes dropping for the fourth day in a row. The S&P 500 fell 0.5%, extending a recent bout of weakness. The S&P 500 is down more than 2.5% since its last record high on August 13. As corporate earnings season winds down, investors are turning their focus to the Iran war, rising bond yields and assessing the outlook for the Federal Reserve. Pressure on consumers The stress from the war with Iran is showing up in markets beyond just crude oil. Diesel prices, essential for the fuel powering trucking and shipping, have surged this year to record highs. The national average diesel price hit a record $5.98 a gallon on Thursday, according to AAA data. The spike in refined oil products is more concerning than crude oil surging, said Claudio Galimberti, chief economist at Rystad Energy. Businesses, industry and consumers use refined products, so the trends in the price of diesel matter more than just what’s going on with Brent crude, Galimberti said. “When it comes to crude, the situation is actually less dangerous than it is in the oil products, specifically diesel,” Galimberti told CNN. Meanwhile, the recent jump in bond yields is driving borrowing costs higher across the economy. Mortgage rates, which tend to track the 10-year yield, are at their highest levels in 15 months. The average 30-year fixed mortgage rate was 6.76% this week, according to Freddie Mac. The rate is significantly higher than it was a year ago when it stood at 6.35% The European Central Bank raised its main interest rate by a quarter of a percentage point to 2.5% Thursday, the second increase this year as the energy shock precipitated by the Iran war drives prices higher. “The conflict in the Middle East continues to generate inflation pressures, and inflation is set to remain well above target for an extended period,” the ECB said in a statement.