Retaliation on Kharg Island weighed as US-Iran hostilies reignite

Oil prices rose more than 3% on Monday.

U.S. West Texas Intermediate crude was up $2.91, or 3.49%, to $86.31.

U.S. forces struck two launchers on Iran’s Larak Island in the Strait of Hormuz on Sunday, the first known American strikes on the country since late July.

In response, Iran attacked two U.S. air bases in Jordan on Sunday.

“Renewed military strikes in the Middle East and concerns of further oil supply disruptions have lifted oil prices,” said UBS analyst Giovanni Staunovo, adding that markets will focus on whether the situation de-escalates or not.

President Donald Trump is working a massive oil deal with Venezuela, but renewed hostilities in the Strait of Hormuz have caused Wall Street futures to drop.

The interest-rate outlook is turning more hawkish with inflation fears stoked.

The losses could set the tone for September, which is typically a weak month for equities, and are likely to up the ante at the U.S. Federal Reserve’s meeting next month.

Traders see a nearly 60% chance of a rate hike at the September meeting, according to the CME FedWatch tool, a sharp increase from 41.4% a week ago, after Fed Chair Kevin Warsh said policymakers may need to increase interest rates if inflation doesn’t ease to the central bank’s 2% target.

“Chair Warsh delivered a distinctly more hawkish message than investors anticipated, making it abundantly clear that policy easing is not on the horizon,” said David Chao, global market strategist, Asia Pacific, at Invesco.

Reuters contributed to this report.