Brent North Sea crude, the benchmark for international oil prices, rose briefly above $90 on Tuesday as hopes of a U.S.-Iran agreement to bring the war to an end continued to diminish.
Brent reached $90.02 a barrel early on Tuesday, a gain of more than 2.5% from Monday, while the main U.S. contract, West Texas Intermediate (WTI), jumped 2.7% to $84.32 a barrel.
Oil prices extended a strong rally as hopes for a reopening of the Strait of Hormuz fade, raising fresh inflation fears and ramping up bets on at least one U.S. interest rate hike this year.
Crude has surged more than 10% over the past week, with the United States and Iran appearing no closer to a deal on the crucial waterway despite upbeat comments from the White House earlier in the month.
In the latest blow, U.S. President Donald Trump said Monday he would seek conflict compensation from Iran as part of any peace negotiations, citing attacks and killings stretching back decades allegedly backed or perpetrated by Tehran.
The U.S. president's announcement was a direct response to Tehran's demand for U.S. war reparations as a precondition to any resolution of the crisis.
Trump's remarks came a day after he said he was "low-keying" his approach to the conflict, suggesting he was prepared to let economic pressure mount in place of further military strikes.
However, the latest back-and-forth risks putting a quick agreement further out of reach, and by Monday evening, both main crude contracts jumped around 5%.
They rose more than 2% Tuesday, with Brent edging back toward $90 a barrel.
"In the absence of any positive headlines on negotiations to reopen the strait, pressure on oil prices has been upward," wrote Jason Wong at BNZ.
And Stephen Innes, global strategist at Quintex Intel, said: "In effect, both sides are trying to weaponize the oil barrel without firing another shot. Washington is trying to choke Iran's ability to get its crude out, while Tehran is squeezing the artery through which everybody else's crude gets through."
"It is quite the game of chicken."
The prospect of oil prices remaining elevated for the time being has revived concerns over inflation and boosted the chances of interest rate increases.
While a surprise loss of more than 20,000 jobs in the U.S. economy last month eased fears of a Federal Reserve (Fed) hike, a spike in price pressures could force the bank's hand.
Cleveland Fed boss Beth Hammack told Yahoo Finance on Monday: "I would say in general, one 25-basis-point move probably doesn't do a whole lot for the economy."
"So it's probably some number of (movements). But I don't want to prejudge what that number is going to be."
The U.S.-Iran deadlock and rising crude costs come as traders await the release of U.S. consumer price data on Wednesday, which could play a key role in guiding the Fed on its next move.
