Oil prices edged higher in volatile trading on Wednesday after the United States launched another wave of military strikes against Iran and reinstated a naval blockade of Iranian ports, reigniting concerns over crude supplies from the Middle East.
U.S. West Texas Intermediate crude for August delivery rose 0.45% to $79.70 a barrel, while Brent crude for September delivery gained 0.68% to $85.31 a barrel as investors weighed the growing geopolitical risk premium against softer-than-expected U.S. inflation data.
The latest advance followed a significant escalation in the conflict after U.S. Central Command (CENTCOM) said American forces carried out a seven-hour operation targeting dozens of Iranian military sites near the Strait of Hormuz and along the country’s southern coastline.
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According to CENTCOM, the operation involved fighter aircraft, naval vessels and unmanned aerial systems that struck missile launch sites, drone facilities, naval assets and coastal defense infrastructure used by Iran to threaten commercial shipping.
The strikes came hours after Washington reinstated a naval blockade covering vessels traveling to and from Iranian ports, marking a renewed effort to restrict Tehran’s maritime operations after the collapse of last month’s interim ceasefire agreement.
CENTCOM Commander General Brad Cooper said Iran had deliberately targeted civilian shipping during the previous week, attacking seven commercial vessels and leaving about a dozen crew members dead, injured, or missing.
The latest military developments have significantly reduced expectations that normal shipping through the Strait of Hormuz will resume anytime soon.
“The latest escalation shows how expectations of a rapid opening of the Strait were premature,” said Saul Kavonic, senior energy analyst at MST Marquee.
“The hostilities and reimposed blockade set the conflict back on an escalatory trajectory.”
Kavonic warned that crude prices could revisit $100 per barrel if current military operations continue for several weeks, with the risk of substantially higher prices should attacks spread to oil production facilities or export infrastructure across the Gulf.
The renewed conflict is once again shifting the market’s focus from physical supply balances toward geopolitical risk.
Although some Gulf producers have partially restored exports through alternative routes, the Strait of Hormuz remains the world’s most strategically important oil chokepoint, carrying a significant share of global crude oil and liquefied natural gas shipments. Any prolonged disruption increases transportation costs, tightens physical supplies, and raises insurance premiums for tanker operators.
The military escalation also complicates the inflation outlook for central banks.
Higher energy prices threaten to offset recent progress in reducing inflation, particularly if sustained increases in crude prices begin feeding through to gasoline, diesel, transportation, and manufacturing costs.
Treasury Yields Declined
Those concerns come just one day after U.S. inflation data surprised markets on the downside.
Consumer prices rose 3.5% year over year in June, while the headline Consumer Price Index fell 0.4% on a monthly basis, marking the first monthly decline since April 2020 as energy prices eased during the survey period.
The softer inflation report prompted investors to scale back expectations for another near-term Federal Reserve rate increase.
Treasury yields fell sharply following the data, with the two-year Treasury yield dropping about nine basis points from a 16-month high as traders reassessed the outlook for monetary policy.
“The market was building a conviction that the Fed was going to hike in September and it’s certainly injected a bit of doubt into that now,” said Chris Turner, head of global markets at ING.
He cautioned, however, that policymakers would likely require additional evidence of moderating inflation before abandoning the possibility of further tightening later this year.
“Short-term, these Fed tightening expectations are going to hang around a bit, so I think the dollar can stay stable, depending on what happens with energy prices,” Turner said.
Federal Reserve Chair Kevin Warsh amplified that message during testimony before the House Financial Services Committee, saying the central bank has “no tolerance” for persistently elevated inflation and would remain committed to maintaining price stability despite political pressure.
Markets are now pricing roughly a 65% probability of a September rate increase, while expectations for an increase later this month have largely disappeared.
Dollar Remained Steady
The evolving interest-rate outlook kept the U.S. dollar broadly steady on Wednesday after its largest daily decline in nearly two weeks.
The dollar index, which measures the U.S. currency against six major peers, held around 100.9, while the euro rose 0.1% to $1.1428 and sterling gained a similar amount to $1.3406. Against the Japanese yen, the dollar traded at 162.24.
Currency markets also reacted to slowing economic momentum in China after second-quarter growth slowed to 4.3%, its weakest pace in more than three years. The weaker growth figures strengthened expectations that Beijing could introduce additional fiscal and monetary stimulus to support economic activity.
Gold Fell Again
Meanwhile, precious metals retreated as rising oil prices revived inflation concerns.
Spot gold fell 0.7% to $4,027.49 per ounce after briefly climbing above $4,100 following Tuesday’s softer U.S. inflation report. U.S. gold futures for August delivery declined 0.9% to $4,034.
Analysts said the rebound in oil prices has quickly altered market sentiment by increasing the likelihood that inflation could remain elevated even as broader price pressures begin easing.
“Higher U.S. crude, gasoline and diesel prices will result in high inflation numbers in the next print in August, that could keep the tone of some Fed officials on the hawkish side, which is not helping gold,” UBS analyst Giovanni Staunovo said.
“In the near term, oil and U.S. gasoline prices will continue to influence gold, as they remain key drivers of U.S. inflation.”
Investors are now turning their attention to the U.S. Producer Price Index, which is expected to provide additional insight into pipeline inflation pressures and help determine whether Tuesday’s softer consumer inflation reading represents the beginning of a broader disinflation trend or merely a temporary pause before higher energy prices feed back into the economy.