Oil and Gas Rise After US Seizure of Iranian Ship Imperils Talks

Mike McGlone, Bloomberg Intelligence Senior Commodity Strategist, breaks down moves in the oil and gas sector as the US seizure of an Iranian ship imperils peace talks.

Oil and natural gas prices jumped after renewed risks to energy flows via the Strait of Hormuz threatened to jeopardize much-anticipated peace talks between the US and Iran.

Both oil benchmarks rose more than 5% while European gas was up about 2% after the US Navy seized an Iranian ship on Sunday and both countries claimed that a fragile ceasefire agreement had been violated.

Prices extended gains after US President Donald Trump told Bloomberg that it’s “highly unlikely” he would extend the ceasefire if a deal is not reached before it ends, and said the Strait would remain blocked until an agreement is finalized. He said the expiration of the ceasefire occurs on Wednesday.

Oil prices have been highly volatile amid rapidly shifting perceptions of the negotiations’ status and whether ships can navigate the critical waterway through which nearly a quarter of the world’s energy supplies transit.

The standoff over Hormuz threatens to deepen the global energy crisis and is just one of the unresolved issues, which also include Iran’s nuclear capabilities and Israel’s ongoing invasion of Lebanon.

Commercial traffic through the strait is at a virtual standstill on Monday, with just one oil products tanker seeking to exit the vital waterway and one oil tanker and a liquefied petroleum gas vessel traveling the other way. The Pentagon said in a social media post that US forces have directed 27 vessels to turn back or return to Iranian ports since the start of the US naval blockade.

“Markets are still betting on a timely resolution, but each day raises shortage risk,” said Bjarne Schieldrop, chief commodities analyst at SEB AB in Oslo. “Physical oil flows remain constrained by disrupted flows, longer voyage times and elevated freight and insurance costs.” A rally in oil drove stocks lower as a turbulent weekend in the Middle East cast doubt on prospects for peace talks between the US and Iran before their fragile ceasefire deal expires.

Equities dropped from all-time highs, with the S&P 500 halting a five-day winning streak as President Donald Trump said it’s “highly unlikely” he would extend the two-week truce if an agreement is not reached before it ends, while noting the Strait of Hormuz would remain blocked until an accord is finalized. Brent crude hovered near $95. Treasuries and the dollar wavered. Despite the recent escalation, markets are expecting a lasting ceasefire to be agreed to in the relatively near future, according to Tom Essaye at The Sevens Report.

While investors will keep their eyes on the situation in the Middle East, a relevant catalyst could come from Trump’s pick to lead the Federal Reserve, Kevin Warsh, who is scheduled to testify before the Senate Banking Committee at 10 a.m. Tuesday.

“I believe that monetary policy independence is earned — and better policy decisions crafted — by steering clear of distractions,” Warsh said in testimony at his confirmation hearing, according to a copy of his remarks viewed by Bloomberg. “I am committed to ensuring that the conduct of monetary policy remains strictly independent,” he said.

The week’s marquee economic report is also due Tuesday. Analysts project a sizable jump in overall retail sales, largely due to sharply increased spending on gasoline. Excluding gasoline and autos, however, economists anticipate the data will signal more tepid demand as high fuel costs prompted budget-constrained consumers to squeeze spending on other things.

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