Hormuz disruption risk rattles supply outlook
Oil-driven market volatility has upended expectations for interest rate cuts, with traders now assigning a 73% probability that the Federal Reserve will hold or raise rates this year.
Market data from CME Group shows a reversal from a month earlier, when traders placed a 74% probability on at least two rate cuts. The shift follows sustained increases in oil prices tied to conflict involving Iran and heightened risks to global energy supply, according to the Associated Press.
Supply disruption drives inflation concerns
Brent crude briefly rose above US$119 per barrel on Thursday, compared with about US$70 before the conflict began. It later settled at US$108.65, up 1.2% from the previous day, after earlier gains during the session. U.S. West Texas Intermediate crude settled at US$96.14 after briefly exceeding US$100.
The increase followed intensified attacks on energy infrastructure across the Middle East. Strikes have affected facilities in Qatar, Saudi Arabia, and Kuwait, including damage to liquefied natural gas operations and refinery sites, Reuters reported.
These developments have raised concerns about sustained supply disruption. The Strait of Hormuz, which carries about 20% of global oil supply, remains central to market risk, with transit activity reduced.
CNBC reported that Dubai crude prices surged above $166 per barrel, while Oman benchmarks and regional premiums reached record levels, indicating localized shortages and transportation constraints.
Rate expectations shift with oil trajectory
Higher oil prices have altered the outlook for monetary policy. The Federal Reserve held interest rates steady at its latest meeting, while projecting higher inflation tied to the conflict.
Traders have reduced expectations for rate cuts, with current positioning indicating a higher likelihood of steady or rising rates. Comments from Federal Reserve Chair Jerome Powell were viewed as limiting the prospect of rate reductions in 2026, the Associated Press reported.
Other central banks, including the Bank of Japan, the European Central Bank, and the Bank of England, also maintained current policy rates earlier in the day.
Bond yields and borrowing costs move higher
Movements in oil prices have carried into fixed-income markets. The two-year U.S. Treasury yield rose to 3.96% before declining to 3.79%. The 10-year yield held at 4.26%, compared with 3.97% before the conflict.
Higher yields have pushed borrowing costs upward, including mortgage rates. Data released Thursday showed that U.S. new home sales declined in January.
Oil volatility drives cross-asset reactions
Oil prices retreated later in the session, easing pressure on financial markets. The pullback helped U.S. equities reduce earlier losses. The S&P 500 declined 0.3% after recovering from a 1% drop and briefly turning positive late in the session. The Dow Jones Industrial Average fell 203 points, or 0.4%, while the Nasdaq composite declined 0.3.
In earlier trading, markets in Asia and Europe recorded sharper declines, with indexes down 3.4% in Japan, 2.8% in Germany, and 2.7% in South Korea.
Bond yields followed a similar pattern, rising alongside oil prices before easing later. The movement across equities, bonds, and commodities has continued since the conflict began nearly three weeks ago, with frequent reversals during trading sessions.
Commodity and corporate impacts
Higher Treasury yields weighed on commodity prices. Gold declined 5.9% to US$4,605.70 per ounce, while silver dropped 8.2%. Mining companies also fell, with Newmont down 6.9% and Freeport-McMoRan declining 3.3%.
Micron Technology fell 3.8% despite reporting higher profit and revenue than analysts expected. The stock gave back part of its nearly 62% gain for the year tied to demand for computer memory.
Rivian Automotive rose 3.8% after announcing that Uber plans to invest up to US$1.25 billion and purchase 10,000 autonomous robotaxis. Shares of Uber Technologies declined 1.7%.
Policy measures and supply responses
Governments have taken steps to address rising oil prices. Reuters reported that U.S. officials are considering releasing additional crude from the Strategic Petroleum Reserve and potentially easing sanctions on Iranian oil held on tankers, estimated at about 140 million barrels.
Late Thursday, Israeli Prime Minister Benjamin Netanyahu said further attacks on Iran’s South Pars gas field would pause at the request of President Donald Trump.
Al Jazeera reported that analysts are considering scenarios where oil prices could exceed $150 or approach $200 if disruptions persist. The International Monetary Fund estimates that each 10% increase in oil prices could raise global inflation by 0.4% and reduce economic growth by 0.15%.
At the same time, increased production from countries including the United States and Canada, along with alternative supply routes, could offset some pressure on prices.
The S&P 500 declined 18.21 points to 6,606.49. The Dow Jones Industrial Average fell 203.72 points to 46,021.43. The Nasdaq composite dropped 61.73 points to 22,090.69.
