Oil prices continued to rise on Monday as Brent crude headed for a record monthly gain, after Yemeni Houthis launched their first attacks on Israel over the weekend, widening the U.S.-Israel war with Iran in the Middle East.
Brent crude futures jumped $3.94, or 3.5%, to $116.51 a barrel at 0703 GMT after settling 4.2% higher on Friday. U.S. West Texas Intermediate was at $102.14 a barrel, up $1.86, or 1.87%, following a 5.5% gain in the previous session.
Global stocks, meanwhile, were in limbo as investors dug in for a conflict they fear will bring a spike in inflation and the risk of recession to much of the globe.
"The market has all but discounted the prospect of a negotiated end to the war, (U.S. President Donald) Trump's claims of ongoing 'direct and indirect' talks with Iran notwithstanding, and is bracing for a sharp escalation in military hostilities, which is a bullish signal for crude, with huge uncertainties on the timing and nature of the outcome," said Vandana Hari, founder of oil market analysis provider Vanda Insights.
Trump said the U.S. and Iran have been meeting "directly and indirectly" and that Iran's new leaders have been "very reasonable," as more U.S troops arrived in the region, while the Israeli military said on Monday it is attacking the Iranian government's infrastructure throughout Tehran.
Brent has soared 59% this month, the steepest monthly jump, exceeding gains seen during the 1990 Gulf War, after the Iran conflict effectively closed the Strait of Hormuz, a conduit for a fifth of the world's oil and gas supplies.
The war, launched on Feb. 28 with U.S. and Israeli strikes on Iran, has spread across the Middle East, raising concern about shipping lanes around the Arabian Peninsula and the Red Sea.
The Financial Times late on Sunday quoted Trump saying the U.S. could seize Kharg Island in the Persian Gulf, from where Iran exports much of its oil, but also that a cease-fire could come quickly.
The Israeli military on Monday said Iran launched multiple waves of missiles at Israel and an attack had also been launched from Yemen for only the second time since the war began.
"The conflict is no longer concentrated in the Persian Gulf and around the Strait of Hormuz, but now extends into the Red Sea and the Bab el-Mandeb – one of the world's most crucial chokepoints for crude and refined product flows," JPMorgan analysts led by Natasha Kaneva said in a note.
Saudi crude exports redirected from the Strait of Hormuz to the Yanbu port in the Red Sea reached 4.658 million barrels per day last week, data from analytics firm Kpler showed.
If exports from Yanbu were disrupted, Saudi oil would need to pivot toward Egypt's Suez-Mediterranean (SUMED) pipeline to the Mediterranean, JPMorgan analysts said.
Attacks in the region escalated over the weekend and damaged Oman's Salalah terminal despite efforts to start cease-fire talks.
Pakistan said it was preparing to host "meaningful talks" to end the conflict over Iran in the coming days, even though Tehran accused Washington of preparing a land assault as the U.S. military builds up forces in the region.
Separately, Vietnam's Binh Son Refining and Petrochemical on Monday said it is in talks with Russian partners to buy crude oil. The company said it would also buy more crude oil from Africa, the U.S. and Southeast Asia.
Stocks in limbo
Meanwhile, shares across Asia fell, with Japan's Nikkei index closing down 2.8%, in a region more reliant on Gulf oil exports. European stock markets were firmer in early trading and Wall Street futures pointed to gains, although they were slim given a recent sell-off.
"Oil is the lightning rod right now," said Eren Osman, managing director of wealth management at Arbuthnot Latham, adding a reopening of the Strait of Hormuz was the key to calming world markets.
"The biggest challenge for us as investors today is that you've got one of the widest ranges of potential outcomes," he said, adding he did not expect a prolonged conflict as he believed Trump had a "pain threshold" for market losses.
Madison Cartwright, senior geo-economics analyst at Commonwealth Bank of Australia, said Iran's control of the Strait of Hormuz nonetheless gave it little incentive to concede and the bank expected the war to run until at least June.
The clampdown on the Strait has sent prices for oil, gas, fertilizer, plastic and aluminium surging, along with fuel for planes and shipping. Prices for food, pharmaceuticals and petrochemical products are all set to rise.
That is particularly bad news for Asia, as much of the region is highly dependent on energy from the Middle East.
MSCI's broadest index of Asia-Pacific shares outside Japan dropped 1.8%.
European stocks were last up 0.3%, while S&P 500 futures and Nasdaq futures pointed to gains of about 0.5% apiece.
"The longer the Strait remains closed, the sharper the drawdown in buffer supplies that could spark dramatic increases in the price of crude oil, natural gas and other commodities," warned Bruce Kasman, global head of economics at JPMorgan.
"A scenario in which the Strait remains closed for an additional month would be consistent with oil prices rising towards $150/bbl and constraints on industrial consumers of energy supply."
Fed in focus as payrolls loom
The inflationary threat has led investors to revise up the outlook for interest rates almost everywhere. U.S. Federal Reserve (Fed) Chair Jerome Powell will have a chance to air his own views at an event later on Monday and the influential head of the New York Fed, John Williams, is also talking.
Data on U.S. retail sales, manufacturing and payrolls this week will provide an update on how the economy is faring. The energy shock, combined with pressure on fiscal budgets from higher borrowing costs and the need for more defence spending, has hit sovereign bond markets. Ten-year U.S. Treasury yields were last at 4.3959%.
Heightened volatility in markets has tended to benefit the U.S. dollar as the world's most liquid currency. The U.S. is also a net energy exporter, giving it a relative advantage over Europe and much of Asia.
The dollar index was trading near a 10-month high at 100.26, broadly flat on the day. Yet more warnings of possible intervention from the Japanese authorities did see the dollar ease 0.3% to 159.775 yen. It crossed the 160 barrier last week for the first time since July 2024, when Japan last acted to buy yen.
The euro dipped 0.1% to $1.1493, not far from a March trough of $1.1409.
In commodity markets, gold gained 0.9% to $4,534 an ounce, having recently drawn scant support as a safe haven or as a hedge against inflation risks.