Renewed Middle East conflict lifts crude prices, pushes Treasury yields to multi-year highs and stokes fears that energy-driven inflation could complicate the Federal Reserve’s path while investors reassess the AI investment boom.

Oil prices rose on Thursday after the United States launched a heavy wave of airstrikes against Iran in retaliation for Tehran’s missile attacks on American forces, reigniting fears of a broader regional conflict that threatens global energy supplies and clouds the outlook for inflation, interest rates and financial markets.

Brent crude, the global benchmark, climbed 1.5% to $92.10 a barrel, while U.S. West Texas Intermediate (WTI) gained 0.9% to $85.23, extending the sharp geopolitical risk premium that has returned to oil markets.

The latest military escalation effectively ends hopes that a brief diplomatic window could contain a conflict that has repeatedly disrupted energy markets since fighting erupted in late February. The United States had paused strikes for two weeks to allow negotiations to proceed, but President Donald Trump signaled earlier on Wednesday that retaliation was imminent.

“We’ll be hitting them hard. They’re going to get a beating,” Trump told Fox News before the operation.

The U.S. Central Command later described the campaign as a “powerful response,” saying American forces struck dozens of Islamic Revolutionary Guard Corps (IRGC) targets, including command centers, missile and drone facilities, coastal defense systems and maritime military assets.

Iran’s Revolutionary Guard has since threatened further retaliation, raising the prospect that hostilities could intensify across multiple fronts and prolong disruptions to global energy flows.

The renewed conflict comes at a particularly fragile moment for oil markets. Since February, attacks around the Strait of Hormuz have repeatedly interrupted commercial shipping through the narrow waterway, which carries roughly one-fifth of global oil consumption and a significant share of global liquefied natural gas exports.

The risks are no longer confined to Hormuz. The Bab el-Mandeb Strait, another strategic maritime chokepoint linking the Red Sea to the Gulf of Aden, continues to face attacks from Yemen’s Iran-backed Houthi movement, reducing shipping flexibility and increasing transportation costs for cargoes that would otherwise bypass Hormuz.

The simultaneous threats to both maritime corridors have significantly raised the probability of prolonged supply disruptions. While physical shortages have not yet materialized on a large scale, insurance premiums, freight rates and shipping risks continue to climb, leaving crude prices vulnerable to further upside even before actual production losses emerge.

Against that backdrop, traders are turning their attention to Sunday’s OPEC+ meeting, where the producer alliance is widely expected to approve another production increase of about 188,000 barrels per day for September as it continues gradually restoring previously withheld output.

However, analysts caution that incremental supply increases are unlikely to fully offset geopolitical disruptions if exports from the Gulf become increasingly constrained.

“The big uncertainty through 2027 will be around the group’s policy, with the potential for pushback on output quotas,” ING strategists said.

Even if OPEC+ raises production as expected, much of the additional supply could prove insufficient to calm markets if shipping bottlenecks intensify or regional producers face operational disruptions. The market’s focus has therefore shifted from production capacity to the ability to safely transport crude to global consumers.

The rebound in oil prices also revives a familiar challenge for central banks.

Unlike demand-driven inflation, which higher interest rates can typically restrain, geopolitical supply shocks are far more difficult for monetary policy to address. Higher crude prices feed through transportation, manufacturing, electricity generation and consumer goods, increasing inflation even as economic growth slows.

That dilemma is becoming increasingly evident in financial markets.

U.S. government borrowing costs continued climbing on Thursday after the Federal Reserve left interest rates unchanged on Wednesday, with the yield on the benchmark 30-year Treasury bond reaching 5.244%, its highest level since 2007.

Markets struggled to interpret mixed signals from Federal Reserve Chair Kevin Warsh after policymakers kept rates unchanged while emphasizing their commitment to returning inflation to the 2% target. Three Fed officials dissented in favor of an immediate quarter-point rate increase, underscoring growing divisions within the central bank over how persistent inflation may become.

The Treasury Market Delivered Its Own Verdict

Short-term Treasury yields declined as investors interpreted the Fed’s cautious stance as reducing the likelihood of near-term tightening, while longer-dated yields rose sharply as investors demanded greater compensation for inflation and fiscal risks.

The steepening yield curve reflects growing concern that inflation may remain elevated for longer than previously anticipated, particularly if oil prices continue climbing. Interest-rate futures now imply a 63.2% probability of another Fed rate increase at September’s policy meeting, up from 57.3% just one week earlier, according to CME FedWatch data.

Yet several economists note that monetary tightening may have limited effectiveness against inflation driven primarily by geopolitical supply constraints.

“It is folly to hike rates in the face of a supply-shock bout of inflation,” said Brian Jacobsen, chief economist at Annex Wealth Management.

RBC Economics also warned that inflation remains the dominant policy challenge facing the Federal Reserve.

“As the Fed heads into the second half of the year… we expect (it) will be faced with the reality of inflation as a persistent issue,” the firm’s strategists said.

Markets Aren’t Spared

The geopolitical uncertainty has also complicated an already critical earnings season for technology companies, where investors are now scrutinizing whether hundreds of billions of dollars invested in artificial intelligence infrastructure are beginning to generate adequate financial returns.

Microsoft provided reassurance after reporting stronger-than-expected results and forecasting continued robust cash generation through fiscal 2027, sending its shares more than 9% higher in premarket trading.

The software giant’s accelerating Azure cloud growth and expanding adoption of Microsoft 365 Copilot reinforced investor confidence that its AI investments are translating into meaningful commercial returns.

Meta Platforms painted a more challenging picture.

The Facebook parent plunged more than 8% after reporting that free cash flow collapsed as AI infrastructure spending accelerated, while management also issued softer-than-expected revenue guidance. The results highlighted the widening divergence among hyperscalers, with investors increasingly distinguishing between companies already monetizing AI and those still absorbing enormous capital expenditures.

Jefferies analysts summarized the contrast by saying Microsoft had “hit the jet stream while Meta is still building the runway.”

Their divergent performances underscore that investors are no longer rewarding AI spending simply because it expands computing capacity. Instead, attention is shifting toward measurable returns on investment, free cash flow generation and the pace at which companies can convert unprecedented capital expenditures into sustainable earnings growth.

Despite renewed geopolitical tensions, Microsoft’s results helped stabilize broader market sentiment.

Nasdaq 100 futures advanced 1.28%, while S&P 500 futures rose 0.59% and Dow Jones Industrial Average futures gained 0.36%.

European equities also recovered modestly, with the STOXX 600 index adding 0.58%, while the MSCI All Country World Index edged 0.22% higher after two consecutive sessions of losses.

Asian markets remained under pressure, however, with South Korea’s technology-heavy KOSPI declining 1.23% for a third straight session as investors continued reducing exposure to richly valued AI-related stocks.

“We don’t think the AI story is over by any means, but clearly there’s scope for bumps along the way,” said Sanjiv Tumkur, head of equity research at Rathbones.