Oil prices surged more than 8% on Tuesday as ongoing geopolitical tensions in the Middle East continued to exert a hefty risk premium on the market.
Brent crude oil hit its highest level of $85.10 per barrel since July 2024 as the conflict between the US and Israel, and Iran escalated.
Meanwhile, gold and silver prices fell sharply due to a stronger dollar.
A stronger dollar makes commodities priced in the greenback more expensive for overseas buyers.
The conflict’s intensification in the Middle East is creating divergent pressures in the base metals markets.
While elevated energy costs are boosting prices, the overall risk-off attitude stemming from heightened long-term economic uncertainties is exerting downward pressure.
Oil spikes
Oil prices spiked to multi-months high as tensions simmered in the Middle East, putting over half of the world’s oil reserves at risk.
Brent crude prices rose to their highest level since July 2024 as the US-Israel conflict with Iran continued to escalate, disrupting supplies from the Middle East.
At the time of writing, the Brent crude price on the Intercontinental Exchange was at $83.19 per barrel, up 7%.
The contract had hit $85.10 per barrel earlier in the day, its highest level since July 19.
The price of West Texas Intermediate crude oil was at $76.04 a barrel, up 6.9%, and had hit $77.57 a barrel, its highest level since last June.
Oil prices climbed following the announcement by a senior Iranian Islamic Revolutionary Guard Corps official that the Strait of Hormuz was closed.
This strait is a crucial choke point, with nearly a third of the world’s seaborne crude exports and a substantial amount of natural gas, primarily from Qatar, passing through it.
The closure comes amid heightened tensions, as QatarEnergy halted production on Monday after being targeted by Iranian drones.
Furthermore, Iran also launched strikes against Saudi Arabia’s Ras Tanura oil refinery.
Due to Iran’s threat to fire upon any vessels attempting transit, oil tankers are currently accumulating at both entrances to the Strait of Hormuz.
Consequently, shipping expenses, including both tanker rental fees and insurance premiums (where obtainable), have dramatically increased.
Bullion slumps
Spot gold prices declined on Tuesday, dropping by over 4% at one point.
This fall was driven by a combination of factors: some investors preferred the dollar over gold as a safe-haven asset amid the impact of the US-Israeli air conflict with Iran, and traders reduced their expectations for interest rate cuts due to ongoing inflation concerns.
Silver on COMEX slumped 7% as a stronger dollar diminished demand for the white metal from overseas buyers.
Following the US-Israeli attack on Iran, gold prices have retreated, falling back below the $5,200 level to where they were last trading on Friday.
Although gold opened with a gap higher on Sunday night amid the news of the conflict, it could not sustain those early gains due to exceptional dollar strength.
“This is likely due to the market now placing greater weight on the inflationary risks resulting from the war in the Middle East and therefore scaling back its expectations for interest rate cuts,” Thu Lan Nguyen, head of FX and commodity research at Commerzbank AG, said in a report.
“This also explains why the US dollar continues to gain ground.”
The US dollar climbed 0.9%, reaching its highest level in over a month, as US Treasury yields also sharply increased.
According to the CME Group’s FedWatch tool, traders anticipate the US Federal Reserve will maintain its current interest rates following its upcoming two-day meeting on March 18.
Furthermore, the probability of a rate hold in June has increased, rising from below 45% to over 60%.
The COMEX gold contract last traded at $5,179.46 per ounce, down 2.5%, while silver was 7% down at $82.528 an ounce.
Base metals
Most base metals prices were in the red on Tuesday, except aluminium.
The Middle East geopolitical situation warrants a higher price for energy-intensive metal production.
This is especially relevant for energy-intensive metal manufacturing, like aluminium production (the Gulf states are also a significant production area for aluminium, as noted in the next point).
Aluminium was the exception as its price per ton increased by 2.7% on the London Metal Exchange on Tuesday, in contrast to other base metals, which saw their prices decline.
Aluminium thus behaved more like gold than other base metals.
“On the one hand, this is because aluminium production is very energy-intensive and therefore rising energy prices — especially rising gas prices — are likely to have a direct impact on aluminium production costs,” Volkmar Baur, FX and commodity analyst at Commerzbank, said.
“On the other hand, however, this is also because the Gulf region itself is a major aluminium producer.”
The Gulf states accounted for 8.3% of global primary aluminium production last year, according to the International Aluminium Institute.
However, their combined share of global aluminium exports (HS group 76), including aluminium products, is significantly higher.
Specifically, the export value from Bahrain, Saudi Arabia, Qatar, Oman, and the United Arab Emirates represents 14.5% of the total aluminium exported worldwide.
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