Oil nears $110 as Middle East conflict lifts yields and bats markets

Oil prices approached $110 per barrel on Friday as fighting around the Strait of Hormuz and further attacks in the region intensified supply concerns, sending Asian equities sharply lower and keeping government bond yields near multi-year highs.

What happened

Crude benchmarks extended gains after a week in which prices rose by more than 30 percent amid exchanges of strikes between the US and Iran around the Strait of Hormuz. Brent North Sea crude was quoted at $107.76 per barrel and West Texas Intermediate at $102.58 per barrel at around 4:30am South African time.

Regional escalation and shipping threats

Tehran has said it is prepared for a more intense conflict, while Yemeni Houthi forces have struck several Saudi Arabian energy targets and seized the Red Sea port city of Mocha. The Houthis have also targeted another key waterway that could limit an alternative route for global energy shipments.

Markets react: equities and bonds

Risk assets came under pressure as investors weighed a growing energy shock alongside rising rate expectations. Asian markets tumbled, with Tokyo’s Nikkei 225 down 2.8 percent at 63,469.39 and other major indexes including Hong Kong and Shanghai posting notable losses.

Meanwhile, US government bond yields climbed to levels not seen in years: the 30-year Treasury yield reached 5.36 percent described in the source as a new post-2007 peak while 10-year yields hovered close to 5 percent and near a 19-year high.

Inflation and central bank pressure

Investors are watching US inflation data closely. A stronger-than-expected consumer price index could increase pressure on the Federal Reserve to raise rates at its upcoming policy meeting. Markets were already factoring in elevated odds of a rate increase, and the European Central Bank this week raised rates and warned of a prolonged period of rising prices.

August producer price figures showed an acceleration to 5.4 percent from 4.8 percent in July, driven by energy prices.

Voices from the market

“The data suggests that cost pressures in the economy are rising and could feed through into higher consumer price inflation, strengthening expectations that the Federal Reserve may need to keep interest rates higher for longer or raise them further,”

said Fiona Cincotta at FOREX.com in the sourced report.

“Attacks on shipping are now feeding directly into oil, natural gas and diesel prices… the longer the confrontation continues, the harder it becomes for markets to treat the energy shock as temporary,”

said Stephen Innes of Quintex Intel.

Key market snapshots

• West Texas Intermediate: up 0.1 percent at $102.58 per barrel
• Brent: up 0.1 percent at $107.76 per barrel
• Tokyo – Nikkei 225: down 2.8 percent at 63,469.39
• Hong Kong – Hang Seng: down 1.2 percent at 24,666.56
• Shanghai – Composite: down 1.7 percent at 3,868.25
• Dollar/yen: up at 154.46 yen

With the conflict showing no sign of abating and energy-driven inflation risks rising, markets face heightened uncertainty as central banks weigh policy moves in the weeks ahead.