Oil prices jumped about 20% in early trading on Monday, hitting their highest since July 2022, as the expanding US-Israeli war with Iran fuelled fears of tighter supply and prolonged disruptions to shipments through the Strait of Hormuz.
Daniel Hynes, senior commodity strategist at ANZ, Sydney, said, "I think prices have rallied this morning on the reports that Middle East producers are now reducing output due to storage facilities filling up fast.
"I certainly think the spectre now of Middle Eastern producers curtailing output is going to keep those prices elevated. The next flag will be whether it eventually reaches a point where they have to start shutting in oil wells, which not only further impacts output but also delays a response once the conflict eases. That would potentially sustain those prices for much longer."
Share futures slid in Asia on Monday as the inflationary pulse from surging oil prices threatened to raise living costs, and perhaps interest rates, across the globe, while an investor hunger for liquidity kept the US dollar in demand.
Brent jumped 15% to $106.94 a barrel, having already soared 28% last week, while US crude rose 17% to $106.75, threatening to push petrol prices quickly skyward.
Iran named Mojtaba Khamenei to succeed his father Ali Khamenei as supreme leader, signalling that hardliners remain firmly in charge in Tehran a week into its conflict with the United States and Israel.
That was unlikely to be welcomed by US President Donald Trump, who had declared the son "unacceptable".
With no sign of an end to hostilities in the Middle East and tankers still not daring to cross the Strait of Hormuz, investors were bracing for a long stretch of higher energy costs.
"The global economy remains dependent on the concentrated flow of Mideast oil and natural gas through the Strait of Hormuz," noted Bruce Kasman, chief economist at JPMorgan.
"The near-term scenario is a near-term spike towards $120 bbl followed by moderation as the conflict soon subsides," he added. "But absent a clear and decisive political resolution, Brent crude oil prices are expected to settle at an elevated $80 bbl through mid-year."
Such an outcome could cut global economic growth by an annualised 0.6% for the first half of this year, and raise consumer prices by an annual rate of 1%, Kasman said.
He cautioned that a broader and sustained conflict could send oil above $120 a barrel and risk a global recession.
The war could leave consumers and businesses worldwide facing weeks or months of higher fuel prices even if the week-old conflict ends quickly, as suppliers grapple with damaged facilities, disrupted logistics and elevated risks to shipping.
Top oil exporter Saudi Arabia is increasing shipments from the Red Sea, but the volumes are far from enough to offset the drop from the crisis-hit Strait of Hormuz, shipping data showed.
Wall Street led the way down as S&P 500 futures shed 1.6%, while Nasdaq futures dived 1.7%.
Japan's Nikkei futures sank to 52,400, down drastically from Friday's cash close of 55,620.
In bond markets, the risk of rising inflation outweighed safe-haven considerations and 10-year Treasury note futures slid 13 ticks, while three-year futures dropped 22 ticks.
Interest rate futures also slipped as investors feared the risk of higher inflation would make it harder for the Federal Reserve to ease policy, even though disappointing jobs numbers seemed to argue for stimulus.
Data on US consumer prices due on Wednesday is forecast to show the annual pace holding at 2.4% in February.
The Fed's preferred measure of core inflation is out on Friday and is forecast to hold at 3.0%, well above the central bank's 2% target, and analysts see a risk of an even higher number.
The danger of energy-driven inflation has led markets to wager the next move in rates from the European Central Bank could be up, possibly as early as June.
For the Bank of England, markets have also shifted to pricing just a 40% chance of one more easing, compared with two cuts or more before the Middle East conflict started.
Nervous investors sought the liquidity of dollars while shunning currencies from countries that are net energy importers, including Japan and much of Europe.
The dollar firmed 0.3% to 158.35 yen, while the euro slipped 0.7% to $1.1534. The Australian dollar, often sold as a hedge during periods of market volatility, skidded 0.7% to $0.6977.
Gold eased 1.0% to $5,117 an ounce, with dealers speculating that investors would have to book profits on the metal to cover losses elsewhere.
