Oil Prices Spike Past $105 on Iran Strike Reports, Then Retreat

A 5% spike, then a quick reversal

On Thursday, October 8, oil had its sharpest one-day move in weeks. The cause was a political news report, and very little changed in the physical supply of crude. The Atlantic, followed by Axios and NBC News, reported that the White House was considering a return to large-scale strikes on Iran and that the Pentagon had told U.S. Central Command to finish preparing for possible "major combat operations." Brent crude rose above $105 a barrel in European trading, up about 5%.14 Reuters reported that both benchmarks were more than $5 higher at their session peaks, which put Brent at its highest level since September 29.16

The gains did not last. Later that day, President Trump posted on Truth Social that the U.S. would not attack Iran before the November 3 midterm elections. He said the naval blockade would stay in place and that 22 million barrels had moved through the Strait of Hormuz the night before.20 CBS News reported that Brent fell from about $105 to about $103 right after the post.15 By late afternoon, December Brent was up about 4.2% at $104.40 and November WTI was up about 3.7% at $91.57.20

Accounts of the peak vary a little. Euronews put WTI near $92.75 at midday in Europe, while The Hill had WTI at $92.19 and Brent at $104.60 in the U.S. morning.1314 Those differences reflect when each outlet took its snapshot. The overall pattern is the same in every report: a sharp jump on war risk, then a partial pullback once the president spoke.

Why a report could move the market this much

The size of Thursday's move makes more sense given where the market already stood. The war began on February 28, and Iran effectively closed the Strait of Hormuz. That route carried roughly a fifth of the world's oil and gas before the war. The U.S. has kept a naval blockade on Iranian ports since then.13 Over the year, Brent spiked to $118.35 at the end of March, dropped to about $71.57 by July 1 during a period of calmer tensions, and then climbed back toward $100 as conflict in the Gulf picked up again.1

Early October was already tense. Reuters reported that tanker attacks hit their highest level of the war the previous week, even as Gulf producers increased exports.16 Ship-tracking firm Kpler counted only seven tankers through Hormuz on Tuesday, the fewest since late July.12 A second supply problem arrived at the same time. Hurricane Isaias forced Gulf of Mexico producers to shut in about a quarter of U.S. offshore oil output as of Wednesday.16 A later report on Friday put the shut-ins at nearly 63% of Gulf production.6 U.S. crude inventories also fell by about 3.2 million barrels, more than expected.20

The market also lost confidence in emergency supply. The G7 and the International Energy Agency had announced a 100-million-barrel release of crude and diesel.15 Traders then concluded that those barrels came out of the 400-million-barrel release already pledged in March, and not from new supply. One analyst quoted by Reuters said the details had disappointed the market.16 After the IEA said members would not go beyond the March commitment, European diesel futures closed 6% higher on Wednesday.12 With inventories thin, a hurricane in the Gulf and limited room for more stock releases, the market was primed to react to any report of escalation.

Equities: oil was one of several pressures

U.S. stocks fell on Thursday, but oil was not the only reason. The S&P 500 ETF lost 0.42% and the Nasdaq 100 ETF fell 1.34%.4 Tech shares were also hit by a report that OpenAI's annualized revenue was about $50 billion, roughly $20 billion below a widely circulated figure.9 Nvidia fell almost 3%, and Microsoft, AMD and Amazon also dropped sharply.8 Europe opened lower as oil revived inflation worries: the Euro Stoxx 50 fell just over 1% and the DAX and FTSE 100 each lost about three-quarters of a percent.14

Friday's rebound shows that the oil spike did not do lasting damage. The Dow rose 423 points to 51,654.95, the S&P 500 gained 0.59% to 7,811.54, and the Nasdaq added 0.64%. All three indexes ended the week higher.3 The S&P 500 gained about 1.2% for the week and set an all-time closing high on Tuesday.7 European markets also recovered on Friday, with the DAX back above 25,000.8

The reasonable conclusion is that stock investors treated Thursday's oil move as a headline shock that faded once Trump spoke. The bigger risk to equities this week was the bond market.

Bonds and the Fed: where oil matters most

The more important effects of the oil spike showed up in interest rates. On Wednesday, U.S. Treasury yields hit 24-year highs, and a $39 billion 10-year note auction cleared at 5.3%.10 On Thursday morning, the 10-year yield was at 5.32% to 5.35%, close to its highest levels since 2002.121417 Europe saw the same pressure, with France's 10-year yield near 4.89% and Germany's near 3.48%.14

The Federal Reserve is in an unusual position. The Fed, now led by Kevin Warsh, raised its target range to 3.75% to 4.00% in September.7 Minutes of that meeting, released Wednesday, showed most officials thought another increase would probably be appropriate before year-end.14 This is the scenario some economists warned about early in the war: an energy shock that pushes the Fed toward raising rates, not cutting them.1

Bond traders, however, did not treat Thursday's oil jump as a reason to expect more tightening. The 10-year yield ended the day 4.8 basis points lower at 5.22%. Market odds of a quarter-point hike at the October 28 FOMC meeting edged down to about 17%.4 One weekly market summary put October hike odds at about one in five and December odds above 80%.7 Investors seem to separate a temporary oil spike from the broader inflation trend. They are likely to wait for consumer price data before changing their rate expectations much.

That makes next Wednesday's CPI report the key event of the coming week. Gasoline prices have already set up a high headline number. A core reading of 0.2% or lower would let the Fed argue that September's hike was enough for now, and a hotter reading would support another increase.7 Prices at the pump are high: AAA puts regular gasoline at $4.36 a gallon nationally, up from $3.12 a year ago, and diesel at $6.28, up from $3.68.12 Diesel is the bigger concern for inflation because it powers freight and logistics, so its costs spread through the price of goods.17

The midterm election and oil prices

Coverage of the political side is mostly consistent. The Atlantic quoted a Republican familiar with the discussions who said strikes would let the president claim a win and suggest gasoline prices were about to fall.13 The same reporting said even supporters of the strikes did not expect them to bring Iran to talks or reopen Hormuz.14 The New York Times reported that the Pentagon has a roughly three-day campaign ready and that Trump has rejected five proposals for major operations in recent months.9

The reports differ on how firm the pause is. An Israeli official told Axios that the chance of strikes rises significantly after the midterms.13 The White House told reporters that "all options" remain available.15 Trump's pledge is limited to the period before November 3. It does not take escalation off the table. The pledge also arrived alongside new pressure on Iran: the Treasury sanctioned 17 vessels it says belong to Iran's "shadow fleet."15

There is a diplomatic track as well. Iran's foreign minister reportedly said Tehran is reviewing a U.S. response to a proposal that could reopen the strait within seven days.16

What to watch

Thursday's swing has three lessons. First, the oil market now reacts strongly to political headlines because the physical cushion is so thin. Aramco has warned that global oil stocks could take two years to rebuild.14 Second, the president's own statements can move prices in both directions within hours, and that should worry anyone hedging fuel costs. Earlier in the war, a Financial Times investigation found $580 million in bets on falling oil prices placed minutes before a Trump post in March, which led to calls for an insider-trading investigation.1 Third, oil's main route into financial markets runs through bond yields and the Fed, and less directly through stocks.

The outlook for Brent depends on events. A real breakthrough on Hormuz could push it toward $96. A failure of talks, another tanker attack or more hurricane damage could send it past $108.7 Bank of America's Francisco Blanch has said a wider conflict that hits major energy infrastructure could lift Brent as high as $150.17 The pre-election pledge has calmed the market for now, but it lasts only about three weeks. With the Pentagon's plans reportedly ready, an Israeli official saying strike odds rise after the vote, and the Fed set to meet on October 28, that calm is likely to be short.