Oil rises about 1% as Trump says Iran will ’pay’ for death of U.S. service members

 Oil prices on Monday ticked up about 1% in a volatile session, as tensions between the U.S. and Iran escalated further and President Donald Trump said Tehran would ’pay’ for the killing of three American service members. Gains were capped amid reports that mediators had sent Iran a proposal to de-escalate the situation.

Meanwhile, oil supply concerns were further exacerbated after Yemen’s Iran-aligned Houthis said they would impose a naval blockade on Saudi Arabia.  

Brent crude futures expiring in September, the global oil benchmark, gained 0.9% to settle at $88.88 a barrel, after briefly topping $90 a barrel earlier in the day. U.S. West Texas Intermediate crude futures expiring in September added 0.9% as well to settle at $82.48 a barrel. Both contracts are coming off their best weekly performances since April and the first week of the Iran war in early March, respectively.   

Washington and Tehran ramped up their rhetoric against each other amid continued fighting. The U.S. military has now pounded Iran for ten consecutive days with strikes, prompting attacks from the country on critical infrastructure sites across the Gulf region. U.S. allies Kuwait and Bahrain also reported more Iranian strikes.

On Sunday, U.S. Central Command said three service members had been killed by Iranian attacks.

"Every time Iran kills an American Soldier they will pay for that killing many times over! This directive has been passed on to Secretary of War, Pete Hegseth, Chairman of the Joint Chiefs of Staff, Daniel Caine, and every Leader in the Military," President Donald Trump posted on his Truth Social service on Monday.

The escalation in tensions this month represents the biggest breakdown in relations since the U.S. and Iran inked an interim peace agreement in mid-June. Iran’s Fars News Agency over the weekend reported that Tehran had officially suspended its commitments under the peace deal, citing Kazem Gharibabadi, the country’s deputy foreign minister for legal and international affairs.

Iran’s state media on Monday reported that President Masoud Pezeshkian told a session of the Supreme Judicial Council that Tehran was now engaged in a "full-scale war" with the U.S. that extended well beyond missile strikes.

Control over the Strait of Hormuz remains a key sticking point, with Iran repeatedly asserting its right over the vital waterway. The country’s military claimed to have intercepted vessels attempting to traverse the chokepoint. Against this backdrop, ships have become increasingly cautious, with Kpler data showing only 30 verified crossings over the weekend. 

"The U.S.’s military strategy seems to be to attack Iran’s offensive and defensive assets until it surrenders its claims on the Strait. As for the U.S.’s long-term strategic plans, it is clear that they are about diminishing reliance on the Strait over time, by supporting the build-out of alternative oil transportation modalities," Thierry Wizman, global FX and rates strategist at Macquarie, said.

"These would be pipelines that go through Iraq, Oman, Saudi Arabia, Syria, and Turkey, thereby reducing Iran’s long-term leverage while aligning regional energy infrastructure more closely with American (and European) interests, and leaving China (whose energy security depends heavily on discounted oil from Iran and Venezuela transported by sea) more vulnerable," he said.

Adding to supply concerns, the Yemeni Armed Forces on Monday said they had declared a maritime embargo against Saudi Arabia, effective immediately. The Iran-backed Houthis can potentially further disrupt oil supplies by threatening maritime traffic in the Strait of Bab el-Mandeb.

"The supply narrative has become more bearish. The anticipated recovery in shipping has effectively stalled, with Strait of Hormuz transit volumes falling to single digits," analysts at ANZ said in a note. They noted that while U.S. production has increased, it had not so far materially altered the broader market balance, and that global inventories continued to shrink, keeping crude and refined products markets tight. 

There was still a glimmer of hope for a diplomatic resolution. Secretary of State Macro Rubio on Sunday said that the U.S. was open to holding talks with Iran, noting that Washington would be "happy" should the opportunity to pursue more discussions arise.

Iran, for its part, has suggested that negotiations with the U.S. could be pursued based on national interests. Reuters reported that mediators had passed Iran a ‌proposal to de-escalate the war with the U.S. through a 10-day ceasefire to find ways to revive the interim peace deal signed in June. Iran’s state media separately said a spokesperson for the Iranian foreign ministry had confirmed receiving proposals from mediators.