Oil prices surge above $105 as rate rise bets grow

Oil prices have surged by around four per cent, with benchmark Brent crude climbing above $105 a barrel as escalating attacks on shipping raise concerns about further disruptions to global supplies.

Brent crude futures rose $4.05, or four per cent, to $105.26 a barrel by 12:15 GMT on Thursday. US West Texas Intermediate crude also moved above $100 for the first time since May, gaining $3.99, or 4.15 per cent, to $100.04.

Brent has now risen more than 30 per cent from lows recorded in early August, with hopes for a lasting agreement between the United States and Iran to end attacks having failed to materialise before fighting resumed.

The latest escalation has added to concerns over the movement of oil through some of the world's most important shipping routes.

Iran-aligned Houthi forces seized control of Yemen's strategic port city of Mocha on Thursday, increasing the threat to shipping along the Red Sea. Meanwhile, tanker traffic through the Strait of Hormuz remains restricted as attacks in and around the Gulf have intensified.

A spokesman said the latest increase in oil prices reflected growing expectations that the conflict could continue for longer than previously anticipated. Any sustained reduction in oil production or exports could leave global markets tightly supplied and keep prices elevated.

Iran said it had attacked 10 ships near the Strait of Hormuz on Wednesday, following US strikes on five Iranian oil tankers. Iran's Islamic Revolutionary Guard Corps has also warned that its response would intensify if further attacks occur.

The Strait of Hormuz is particularly important to global energy markets because a substantial share of the world's oil supply passes through the narrow waterway.

China could determine where prices go next

While fears of a prolonged disruption to Gulf supplies have pushed Brent above $100, analysts say the strength and duration of the rally could depend heavily on demand from China.

China is the world's largest crude oil importer and has increased its purchases in recent weeks after a period of weaker demand.

A spokesman said a sustained recovery in Chinese buying could amplify the impact of supply disruptions and put additional upward pressure on oil prices. Conversely, weaker Chinese imports could limit further gains.

For months, expectations of subdued Chinese demand had been one of the main arguments supporting a more cautious outlook for oil prices. A renewed increase in purchases could therefore significantly change the market balance.

The oil surge is also adding to concerns about inflation and putting pressure on financial markets.

US shares moved lower on Thursday, with the S&P 500 falling 0.6 per cent and heading towards a fourth consecutive daily decline.

Higher crude prices are already being felt by American motorists. The average price of regular petrol in the United States has climbed to almost $4.28 a gallon, according to the American Automobile Association.

The impact extends beyond filling stations, with higher fuel and transport costs potentially feeding into the prices of goods moved by road and other forms of freight.

Rate rise expectations increase

The jump in energy prices has also changed expectations about the next move by the US Federal Reserve.

Financial markets are now pricing in an almost 70 per cent chance that the Fed will increase its federal funds rate at its meeting next week. That compares with a probability of about 61 per cent a day earlier.

The shift comes despite continued pressure from President Donald Trump for interest rates to be reduced.

Rising oil prices present a difficult challenge for central banks because they can increase inflation at the same time as higher borrowing costs threaten economic growth.

If the conflict continues to disrupt energy supplies, markets could face further pressure from rising fuel costs, persistent inflation concerns and increased expectations of tighter monetary policy.

For consumers and businesses, the direction of oil prices in the coming weeks could therefore have consequences well beyond the energy sector.