Global markets reacted to escalating tensions between the US and Iran on Tuesday, as a fragile ceasefire appeared to unravel. The US military reported sinking six Iranian small boats in the Strait of Hormuz, which it claimed were targeting civilian vessels. Meanwhile, two US-flagged ships successfully navigated the strait, a crucial waterway for oil and gas transport that remains largely closed despite US demands for its reopening. The United States has imposed a sea blockade on Iranian ports, and President Donald Trump's 'Project Freedom' plan to guide stranded ships through the strait commenced on Monday. Talks aimed at a permanent end to the conflict have stalled, with tensions further exacerbated after the United Arab Emirates, a US ally, reported coming under attack from Iran for the first time since last month's ceasefire.
Oil prices, which had surged earlier in the week, fell back amid the escalating conflict. Brent crude, the international benchmark, dropped $1.22 to $113.22 per barrel, while US West Texas Intermediate slipped $2.08 to $104.34 per barrel. Analysts from ING Bank noted the first signs of the ceasefire breaking down, warning that 'Project Freedom' risks further escalation. They also cautioned that any relief from stranded vessels making their way through the Strait of Hormuz would be temporary.
Asian stock markets declined on Tuesday, mirroring losses on Wall Street. Hong Kong’s Hang Seng index fell 1.1%, while Australia’s S&P/ASX 200 lost 0.5%. European stocks were also expected to open lower, with investors digesting the latest developments in the Iran war. The Reserve Bank of Australia raised its benchmark interest rate to 4.35%, citing increased fuel and commodity prices due to the conflict. Chevron CEO Mike Wirth warned of growing fuel shortages in some regions as the strait remains closed.
President Trump warned Iran that it would be 'blown off the face of the earth' if it targeted US ships protecting commercial traffic through the strait. He also suggested that South Korea should join the mission after a South Korean cargo vessel came under fire in the waterway. Global oil inventories are not yet at critically low levels, but the pace of drawdowns is raising concerns about localized shortages, particularly in petrochemical feedstocks and jet fuel.