Brent crude surged past the $100 per barrel mark on Thursday after Iran-backed Houthi rebels opened a second operational front in the Middle East conflict, attacking Saudi ships in the Red Sea. The escalation triggered a sharp market reaction, sending the 10-year U.S. Treasury yield to roughly 4.7% - its highest level since January 2025 - on growing worries that inflation will remain sticky.
Energy markets that are exposed to both the Strait of Hormuz and the Red Sea face an immediate and direct impact from the unfolding events. Analysts pointed to a complicating factor for Saudi-linked assets: an unexpected new condition from President Trump on a civilian nuclear agreement with Saudi Arabia that introduces additional uncertainty.
Although oil futures eased somewhat before the New York Stock Exchange opened on Friday, Brent's break above $100 on Thursday represented the largest single-day percentage increase in months. Market observers said the jump underlines a structural vulnerability in supply and inventories rather than a one-off price spike. In recent months global stockpiles have been drawn down markedly, Ukrainian strikes have severely damaged Russian refining capabilities, and now both of the world's most critical energy shipping lanes are simultaneously threatened.
Goldman Sachs commodity strategists said they expect prices to retain most of their recent gains through July and August as global and OECD commercial stocks continue to decline.
On July 23 President Trump told Axios that he was "close" to deciding on a "massive attack" on Iran "bigger than ever before," and that Tehran "haven't received enough pain yet." Two U.S. officials also told Axios that, despite the rhetoric, no new military orders have been issued.
The contrast between the president's public statements and the Pentagon's posture underscores a key dilemma, according to Vital Knowledge analyst Adam Crisafulli. He framed the choice as constrained: an unwillingness to deploy ground troops in a conflict that lacks broad domestic support, a difficulty in walking away entirely, and an intolerance for the status quo to persist indefinitely.
Crisafulli wrote that the president "seems extremely reluctant to go down the former path [escalation], the latter [deal] remains the most likely outcome."
Diplomatically, prospects for de-escalation are complicated by actions and responses from Iran. The New York Times reported that Tehran rejected a cease-fire proposal relayed through Iraq's prime minister and also declined a memorandum of understanding. That rejection was described as reflecting a sharp internal divide between Iran's negotiating team and its hardliners, a split that leaves neither faction with a clear mandate to strike a deal. Iran's demonstrated capability to hit U.S. military assets and key regional infrastructure further strengthens its negotiating leverage.
Adding to the uncertainty was what officials described as a late pivot in White House policy on the Saudi civilian nuclear agreement. After signing the deal, the president announced on July 23 that it would be "totally subject to Saudi Arabia joining the very respected and successful Abraham Accords," a condition that some officials reportedly found surprising and which analysts warned could jeopardize the agreement.
Markets also reacted through the bond market to rising oil prices. Jim Wyckoff of the American Gold Exchange told Reuters that higher crude costs are pushing bond yields higher on the belief that central banks will face difficulty lowering interest rates if inflation proves problematic.
The European Central Bank on Thursday kept its policy rate unchanged at 2.25% while indicating a further hike in September is nearly certain. ECB President Christine Lagarde said the milder inflation scenario "looks quite unlikely, let's face it," reinforcing the view that interest rates may remain elevated for longer.
Given the president's apparent reluctance to commit U.S. ground forces, market observers assess that, however messy the process, a negotiated settlement remains the most probable eventual outcome.
Key points
- Brent crude topped $100 per barrel after Houthi attacks on Saudi ships in the Red Sea, triggering the largest daily oil price jump in months and lifting the 10-year U.S. Treasury yield to about 4.7%.
- Structural supply pressures - including depleted global inventories and damage to Russian refining from Ukrainian strikes - combine with threats to both the Strait of Hormuz and the Red Sea.
- Diplomatic uncertainty increased after President Trump conditioned a Saudi civilian nuclear deal on Riyadh joining the Abraham Accords, and Iran rejected cease-fire overtures and a memorandum of understanding.
Risks and uncertainties
- Further disruptions to critical shipping lanes could sustain elevated oil prices, impacting energy markets and inflation-sensitive sectors.
- Higher crude prices are contributing to rising bond yields, which could limit central banks' room to lower interest rates and affect fixed income markets and borrowing costs across the economy.
- Diplomatic fragmentation in Iran and shifting conditions attached to international agreements could prolong regional instability and market volatility.