Oil prices surge amid continued shuttering of Hormuz; Fed holds rates as expected

Oil prices jumped on Wednesday, after media reports about an extended U.S. naval blockade and a rejection of a peace proposal by Iran kept tensions elevated in the Middle East.

The critical Strait of Hormuz remained shut amid an impasse between the U.S. and Iran, keeping supply disrupted. Traders also digested the United Arab Emirates’ move to leave the OPEC cartel and a widely expected decision by the Federal Reserve to hold interest rates steady.

At 14:27 ET (18:27 GMT), Brent oil futures expiring in June, the global crude benchmark, were up 6.2% to $118.11 a barrel, while the more active contract expiring in July climbed 5.8% to $110.39 a barrel. U.S. West Texas Intermediate crude futures gained 6.8% to $106.74 a barrel.

Trump says prepare for extended blockade, rejects Iran’s offer

The Wall Street Journal on Tuesday said Trump had instructed aides to prepare for a prolonged naval blockade of Iran’s ports and coastline, citing U.S. officials. The report added that Trump viewed the blockade as less risky than either resuming large-scale military strikes on Iran or pursuing a rapid diplomatic exit.

Media reports on Tuesday said Trump was unhappy with a three-step Iranian proposal that would have reopened the strait while deferring negotiations on its nuclear ambitions to a later date. The WSJ report on Wednesday said Trump was not willing to drop a key demand that Iran commit to suspending uranium enrichment for at least 20 years.

Trump later told Axios that he saw the blockade as "somewhat more effective than the
bombing" and that he would not lift it because he doesn’t want Iran to have a nuclear weapon. Axios also reported that the U.S. Central Command had prepared a plan for a "short and powerful" wave of strikes on Iran to break the deadlock in negotiations, citing three sources with knowledge of the matter.

"Iran can’t get their act together. They don’t know how to sign a nonnuclear deal. They better get smart soon!" Trump posted on social media, along with a picture of him holding a gun with the caption "NO MORE MR. NICE GUY!"

Fed holds rates steady

Away from the Middle East conflict, energy market participants are also received what is expected to be the final interest rate decision by the Fed under the leadership of current chair Jerome Powell.

The Fed left its key policy rate steady as widely expected, with Powell at the last meeting saying that it was too soon to gauge how surging oil prices might affect U.S. inflation and the economy.

Data since the Fed’s last meeting has shown a notable impact of higher oil prices on headline inflation figures, though core figures, which exclude food and energy, have not risen as much as feared.

Notably, the Fed’s move saw four dissents, the highest number since 1992. One policymaker preferred a 25 basis point cut, while three policymakers did not support the inclusion of an easing bias in the central bank’s statement "at this time."