Key Highlights

  • President Trump rejected a seven-day plan that Iran presented at the United Nations General Assembly.
  • Fed Governor Lisa Cook also flagged "the pass-through of higher oil prices" as a source of Inflation pressure.
  • Reports of possible diplomacy later took some of the heat out of the early oil spike.
  • Oil traders returned from the weekend to bad news for peace talks after Trump rejected Iran's Hormuz plan.

Crude prices climbed on Monday, September 28, after President Trump rejected Iran's seven-day plan to reopen the Strait of Hormuz, dashing hopes of a quick diplomatic breakthrough.

The weekend that moved oil

Oil traders came back from the weekend to bad news for peace. President Trump rejected a seven-day plan that Iran presented at the United Nations General Assembly. Iran offered to reopen the Strait of Hormuz and restart nuclear talks in exchange for the release of funds, the lifting of sanctions and an end to the naval blockade. Trump called the proposal "unacceptable."

Markets had been hoping for a path toward reopening one of the world's most important oil chokepoints. Instead, they got a stalemate.

How prices reacted

Crude spiked early. West Texas Intermediate for November delivery jumped by more than $4 at one point, before settling only modestly higher at around $92.60, up roughly 20 cents. 30.

Brent crude, the international benchmark, traded near $108 in Asian hours, and the front-month contract settled at about $105.28, up 96 cents.

Edward Jones summed up the morning: "U.S. Equity markets have opened on the back foot this morning as waning hopes for a diplomatic breakthrough in the Middle East push crude prices higher."

Why Hormuz matters so much

The Strait of Hormuz links the Persian Gulf to the open ocean, and a huge share of the world's seaborne oil normally passes through it. Traffic is still far below normal. There were 132 transits through the strait from September 21 to 27, compared with about 130 per day before the war. In other words, a full week of traffic now roughly matches a single pre-war day.

Any sign that reopening is delayed keeps a risk premium in oil prices.

Voices from the market

Analysts were quick to connect the dots. James "Rev Shark" DePorre of market reports said: "Without progress on Iran, it will be tough for oil or bonds to reverse.The two sides are not even negotiating the same thing." Kyle Rodda of Capital.com said: "Geopolitical risk will define the start of the new trading week after a stall in diplomatic progress between the U.S. And Iran."

The day also brought a note of restraint. Reports said that Washington "could ease certain sanctions in exchange for concessions," and market reports said talk of negotiations helped keep oil's gains in check by the settlement.

The ripple into bonds and stocks

Higher oil feeds inflation fears, and that pushed Treasury yields higher. TD Securities' Prashant Newnaha said: "President Trump knocking back Iran's offer for diplomacy is driving a renewed rise in oil prices and is weighing on USTs." The 10-year yield hit its highest since 2007. Fed Governor Lisa Cook also flagged "the pass-through of higher oil prices" as a source of inflation pressure.

Energy was one of only three S&P 500 sectors to rise. Exxon Mobil (NYSE:XOM) climbed to $162.53 and Chevron (NYSE:CVX) rose to $206.23. The S&P 500 as a whole fell 59.72 points to 7,683.69.

For India, a major oil importer, higher crude prices are a direct concern for inflation and the rupee.

Diplomacy is the key variable for oil

Diplomacy is the key variable. Reports that Washington could ease some sanctions in exchange for concessions trimmed oil's gains on Monday, so any follow-up will matter. On the data side, Wednesday's PCE inflation report and Friday's jobs report will show how oil is feeding into the US economy and Fed expectations.