Shares skid, oil surges again as Iran attacks Gulf shipping

(Corrects U.S. crude’s move overnight in paragraph 2)

By Stella Qiu

SYDNEY, March 12 (Reuters) – Shares fell in Asia on Thursday as oil prices jumped on reports that more ships had been struck in the Strait of Hormuz and in Iraqi waters, fuelling inflation and pushing borrowing costs higher worldwide. 

U.S. crude rose 7.5% to $93.80 a barrel, extending a rise of more than 4% overnight. Brent crude futures jumped 7.7% to $99.03 a barrel. 

That was despite plans from the International Energy Agency to release 400 million barrels of oil from its reserves, the largest such move in its history. The U.S. said it would release 172 million barrels of oil from next week, as part of the IEA plan. 

Two fuel tankers in Iraqi waters had been struck by explosive-laden Iranian boats, Iraqi security officials said early on Thursday, while an Iraqi official told state media that oil ports “have completely stopped operations.”

“Multiple tankers loaded with Iraqi crude are now reported burning in the Persian Gulf off the coast of Basra, engulfed in flames and leaking burning oil into the water,” said Tony Sycamore, analyst at IG.

“This appears to mark a direct and forceful Iranian response to the IEA’s overnight announcement of a massive strategic reserve release aimed at cooling runaway prices.”

Iran had earlier stepped up attacks on merchant ships in the Strait of Hormuz, telling the world to get ready for oil at $200 a barrel. On Wednesday, three vessels were reported to have been hit in Gulf waters as Iran’s Revolutionary Guards said their forces had fired on ships in the Gulf that had disobeyed their orders.

U.S. President Donald Trump on Wednesday declared the war on Iran has been won but he will stay in the fight to finish the job, throwing more uncertainty in the mix. 

All of this was bad for shares. MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.8%, while the Nikkei dropped 1.6% as Japan is a major importer of oil and gas. 

Both S&P 500 futures and Nasdaq futures fell 0.8%. Over in Europe, EUROSTOXX 50 futures fell 0.6% and DAX futures slid 0.8%. 

INFLATION RISKS 

U.S. data showed the consumer price index rose 0.3% in February, in line with forecasts and above January’s 0.2% increase, but it was rendered obsolete given the Iran war has fuelled inflation.  

In bond markets, the risk of rising inflation outweighed safe-haven considerations to shove yields higher globally. Yields on 10-year Treasury notes rose 4 basis points to 4.2472% on Thursday, having jumped 6 bps overnight. 

Fed funds futures extended their slide as investors feared higher inflation would make it harder for the Federal Reserve to ease policy. Markets are just wagering one more rate cut from the Fed this year.

The danger of energy-driven inflation has led markets to wager the next move in rates from the European Central Bank could be up, possibly as early as June.

Nervous investors sought the liquidity of dollars while shunning currencies from countries that are net energy importers, including Japan and much of Europe.

The euro slipped 0.3% to $1.1536, after closing at the weakest level since November last year. The dollar inched up 0.1% to 159.12 yen, the strongest level since January when reported rate checks from the U.S. Fed spooked yen bears. 

The risk sensitive Australian dollar lost 0.4% to $0.7127, having hit a more than three-year high of $0.7188 on Wednesday as bets for an imminent rate hike from its central bank grew. 

(Reporting by Stella Qiu; Editing by Lincoln Feast.)