Oil surges on Iran exit, Brent eyes US$100 barrier

Brent oil looks set to move above US$100 and potentially stay there for a while. That scenario would change the game for investors.

This is the warning from Nigel Green, chief executive of the global financial advisory group deVere Group, after reports that Iran has halted negotiations with the United States and threatened to close the Strait of Hormuz, sending oil prices sharply higher and raising fresh doubts about how quickly the conflict can be brought under control.

The latest escalation comes as markets are being forced to confront a possibility many had been reluctant to fully accept: that the conflict could last far longer than expected, keeping pressure on energy prices and inflation worldwide.

“Iran pulling out of talks changes the picture. The market has spent months assuming there would be a diplomatic exit. Today that assumption looks much harder to defend. Oil is already reacting, and I think it goes higher. I cannot see this being resolved quickly,” Green said.

Oil prices surged after Iran’s state-affiliated Tasnim news agency reported that Tehran would stop indirect negotiations with Washington and move towards closing the Strait of Hormuz in response to what it described as violations of a ceasefire agreement.

Concerns heightened

The development has heightened concern because the Strait of Hormuz remains one of the world’s most important energy corridors, carrying around one-fifth of global oil consumption and a significant share of international LNG supplies.

The reports also referenced the Bab el-Mandeb Strait, another strategically important maritime route linking the Red Sea with the Gulf of Aden.

Green said investors have repeatedly looked beyond military escalation because they believed negotiations would eventually resume. “Investors have been remarkably willing to look through the setbacks. Every time tensions increased, the prevailing view was that diplomacy would eventually catch up. At some stage, markets stop giving negotiations the benefit of the doubt.”

Despite months of conflict, crude prices have remained below levels normally associated with severe supply disruptions, reflecting confidence that the fighting would ultimately remain contained.

This confidence is now facing its toughest test.

The significance extends far beyond the oil market itself.

Reigniting inflation

A sustained move above US$100 crude would risk reigniting inflation concerns just as many major central banks have been moving towards lower interest rates. Higher energy costs tend to ripple quickly through economies, affecting transport, manufacturing, business costs and household spending.

Green said the latest developments could force investors to reassess some of the assumptions that have supported markets this year. “One of the reasons markets have remained resilient is because investors have expected inflation pressures to continue easing. A prolonged period of higher oil prices complicates that outlook. It raises questions about inflation, interest rates, corporate profitability and consumer demand at the same time.

“That is why this matters beyond the energy sector. Investors are not only watching oil. They are watching what higher oil could mean for the broader economy.”

Green said one of the biggest risks is that markets have underestimated how long the conflict could last. “The consensus view has been that the war would be contained and eventually brought under control. I think many investors have been expecting something measured in weeks rather than months. If we are still discussing suspended negotiations and threats to major shipping routes later in the summer, that expectation will come under serious pressure.”

Green believes energy markets are beginning to signal a reassessment of that outlook. “Brent looks set to move above $100 and potentially stay there for a while. The market can absorb disappointment for a period of time. But eventually repeated disappointments change expectations. If confidence in a diplomatic solution continues to weaken, oil prices have further room to move higher from here.”