Oil soared above $107 a barrel on Monday on news President Trump rejected an Iranian peace proposal and expects to resume US strikes after the November midterms – threatening to keep inflation higher for longer.
Brent crude futures jumped 2.6% to $107.02 a barrel and West Texas Intermediate rose 2.7% to $94.91 by 12:15 p.m. ET.
National average gasoline prices reached $4.48 a gallon, according to AAA, far above the pre-war average of $2.98 a gallon in February and $3.13 last September.
Elevated energy costs have been the main driver of inflation over the past few months, and economists have warned they could easily bleed through to other sectors – raising prices for food and apparel, among other goods.
The Dow Jones Industrial Average sank 349 points, or 0.7%, Monday morning while the S&P 500 and Nasdaq tumbled 0.8% and 0.9%, respectively.
Treasury yields ticked higher as investors worried that a prolonged Middle East conflict could keep inflation stubbornly high, prompting the Federal Reserve to issue more interest-rate hikes this year.
The US 10-year Treasury yield hit 5.263% and the 30-year Treasury yield rose to 5.579%.
Nic Puckrin, cross-asset analyst and founder of Coin Bureau, said in a Monday morning note that rising energy costs amid the war in Iran don’t seem like a temporary shock anymore.
“Refined-product supply is being exhausted, the Strategic Petroleum Reserve is at its lowest level since 1982, and the political situation is getting more fraught as we approach the midterms,” he wrote. “Meanwhile, cold weather in the Northern Hemisphere is just around the corner.
“Add to that the ocean of debt the US is drowning in, and yields above 5% start to look like the new normal.”
Trump on Saturday confirmed that he rejected an Iranian proposal to reopen the Strait of Hormuz, a critical maritime route for energy supplies that has been effectively blockaded over the past seven months.
“I like making a deal, too. But, I’m not – that deal would not be acceptable,” he told reporters as he was departing the White House. “They want to make a deal where they open the strait immediately because they’re losing so badly.”
Iran’s proposal would have required the US to unfreeze some Iranian assets, end its blockade of Iranian ports and lift sanctions on oil exports, in exchange for Tehran reopening the shipping route and restarting nuclear negotiations within seven days, the Wall Street Journal reported.
Trump also reportedly told aides that he expects to resume bombing Iran after the midterm elections. Earlier this month, he publicly said he expected the Middle East conflict to end soon after the midterms and for oil prices subsequently to nosedive.
The commander-in-chief is “very seriously” considering a ban on diesel exports, in order to fight soaring prices, Trump said Sunday.
Iranian Foreign Minister Abbas Araghchi said his country is prepared for a “doomsday war” with the US, though he claimed the regime prefers a peace deal.
“We stand firm in the face of any aggression against us, even when it comes to a doomsday war,” he told NBC’s “Meet the Press” in an interview aired Sunday. “At the same time, we are ready for diplomacy.”
He called Iran’s seven-day cease-fire proposal a “very reasonable plan on the table.”
Though American energy reserves are dwindling, the situation is particularly dire for European nations, according to Stephen Coltman, head of macro at 21shares.
“Europe is particularly exposed heading into winter as a net importer of both US diesel and Qatari LNG,” Coltman wrote in a note Monday. “Gas inventories in Europe are much lower than seasonal norms and demand is set to rise rapidly in the weeks ahead.”