Oil prices rose on Tuesday as optimism faded over the possibility of the United States and Iran reaching an agreement to end their confrontation and reopen the Strait of Hormuz.

Brent crude futures for July delivery climbed 3.1% to $107.46 per barrel by 1:50 PM Eastern Time, while US West Texas Intermediate crude futures for June delivery rose 3.7% to $101.65 per barrel.

US President Donald Trump rejected Iran’s counteroffer to the American proposal aimed at ending the conflict, describing it on Monday as “nonsense,” and warning that the ceasefire was now “on life support.”

Amos Hochstein, former energy adviser to former US President Joe Biden, said in an interview with CNBC: “We are in a frozen conflict and a frozen standoff.”

He added: “Right now the strait is closed, so we are facing a situation with no war, no oil, and no shipping lanes.”

Hochstein indicated that a breakthrough this week appears unlikely as Trump heads to China to meet Chinese President Xi Jinping.

He expects oil prices to remain elevated within a range of $90 to $100 per barrel through the end of the year and possibly until 2027, even if the Strait of Hormuz reopens in early June.

He added: “The oil market is heading toward the edge of a cliff if the United States and Iran fail to reach an agreement by June.”

He continued: “When the oil and energy market falls off the cliff, it becomes very difficult to recover quickly. At that point, it is no longer about returning to normal conditions, but rather a process that takes a very long time.”

Meanwhile, Admiral James Stavridis, former Supreme Allied Commander of NATO forces, said Trump is facing three options “and all of them are bad”: either withdraw from the conflict, resume a large-scale bombing campaign, or attempt to reopen the Strait of Hormuz by force.

Stavridis considered reopening the strait by force the most likely option at the moment, but noted that it would require massive naval resources, ground forces, and costs reaching $1 billion per week.

Since the outbreak of the US- and Israeli-led war against Iran on February 28, both WTI and Brent crude prices have risen more than 40%.

Citi said in a note that oil prices “remain volatile and could move higher if US-Iran negotiations remain complicated.”

Henry Wilkinson, chief intelligence officer at geopolitical risk firm Dragonfly, said the possibility of escalation with Iran still remains, adding that Trump may ask Xi Jinping to pressure Tehran into accepting US conditions during the expected Washington-Beijing talks this week.

In the same context, Saudi Aramco CEO Amin Nasser warned on Monday that the oil market may need until 2027 to return to balance if the Strait of Hormuz remains closed beyond mid-June.

Nasser said during the company’s first-quarter earnings conference: “If the Strait of Hormuz reopened today, the market would still need months to regain balance, and if reopening is delayed for additional weeks, stability may not return until 2027.”

Growing political pressure on British Prime Minister Keir Starmer is pushing up UK government borrowing costs, but political uncertainty is not the only factor driving British bond yields to the highest levels among major advanced economies.

Yields on 10-year UK government bonds — which determine the government’s future borrowing costs — rose on Tuesday to 5.13%, the highest level since 2008.

Gordon Shannon, partner at investment firm TwentyFour, which manages £23.5 billion ($32 billion) in fixed income assets, said: “There is a significant amount of fear reflected in the pricing of UK bonds.”

He added that most potential candidates to succeed Starmer — who came to power in July 2024 with a large parliamentary majority — may seek to increase government borrowing, with the possible exception of Health Secretary Wes Streeting.

Shannon noted that Andy Burnham, the mayor of Greater Manchester, who would first need to return to parliament in order to succeed Starmer, could borrow an additional £50 billion over five years, almost 12% above current borrowing plans, if defense spending is excluded from current fiscal rules as he previously proposed.

Memories of the Liz Truss crisis remain present

The experience of former Prime Minister Liz Truss still casts a shadow over the appeal of UK bonds to international investors.

Her tax-cutting program triggered a collapse in long-term bond prices, forcing the Bank of England to intervene to halt a sharp selloff by pension funds amid fears of so-called “bond vigilantes.”

Kevin Thozet, investment committee member at French asset manager Carmignac, said investors imposed what he described as a “moron premium” on Britain after the mini-budget crisis launched by Truss, adding: “We may be heading back toward a similar environment.”

However, Shannon ruled out a repeat of the same sharp selloff, explaining that British politicians who want to increase borrowing now understand the need to prepare markets in advance and retreat if negative reactions emerge.

UK 10-year bond yields stand at around 5.12%, compared with 4.45% in the United States — where economic growth is stronger — and 3.10% in Germany, which is viewed as more fiscally disciplined.

Since the start of the year, UK yields have risen by 0.64 percentage points, more than double the increase recorded in comparable US and German bond yields.

Although higher yields affect only the cost of new debt, meaning the impact on the government budget is not immediate, Britain’s fiscal watchdog estimates that every one-percentage-point increase in yields would cost the government an additional £15 billion annually in debt interest by 2030.

In contrast, the government has only £24 billion of fiscal headroom to meet its target of balancing the current budget by 2029-2030.

Britain is more exposed to inflation

Alexandra Ivanova, fund manager at Invesco, believes politics is not the only factor behind the rise in UK borrowing costs.

She said: “We need to remind investors of the basics of finance. You have to think about what you are being paid for in the yield: liquidity risk premium, political risk premium, term premium, inflation risk premium... and in the case of UK bonds, every one of these components is higher than almost anywhere else.”

She added that UK bonds do not look like an attractive bargain despite their high yields.

Inflation risk is the clearest factor, as the US-Israeli war with Iran has pushed oil and natural gas prices up by around 50% since the end of February.

Britain relies on natural gas imports, while the Bank of England expects inflation to exceed 6% early next year if energy prices remain high for a long period. Before the outbreak of the war, the central bank had expected inflation to return to its 2% target.

While inflation in the eurozone had returned to target levels before the war, it remained more persistent in Britain due to higher services prices, regulated utilities, and wage growth since the coronavirus pandemic.

Financial markets are currently pricing in the possibility of the Bank of England’s key interest rate rising to 4.5% by February 2027, compared with the current level of 3.75%, while pre-war expectations had pointed to one or two rate cuts.

Higher volatility in UK bonds

Another less obvious reason for higher UK yields is that British government bonds are more volatile than their US and German counterparts.

For most of the past 20 years, British pension funds and insurance companies bought long-term bonds to cover their future liabilities, but the shift by companies away from defined-benefit pension schemes ended this trend.

Nicola Trindade, senior portfolio manager at BNP Paribas Asset Management, said current buyers of UK bonds are often foreign hedge funds that are more price-sensitive and operate with shorter investment horizons, increasing market volatility and prompting investors to demand higher yields.

Some investors also blame the Bank of England’s bond-selling program — worth £70 billion annually — as one of the factors pushing yields higher.

Although Shannon believes the political risk premium may decline over the medium term, he pointed to the difficulty of assessing the other factors.

He concluded: “You need to attract a diverse range of foreign investors, and constantly changing prime ministers is not what people want to see.”

The British pound

The British pound fell against the dollar and the euro on Tuesday as markets closely monitored political developments amid growing concerns that British Prime Minister Keir Starmer may step down.

Starmer was holding consultations with colleagues over whether he could remain in office ahead of a decisive cabinet meeting, after the resignation of ministerial aides and a public call by around 80 lawmakers for him to leave.

The British pound fell 0.45% to $1.3550, after rising more than 0.5% last Friday when Starmer pledged to remain in power following the heavy losses suffered by the ruling Labour Party in local elections. Sterling had recorded $1.3658 last week, its highest level since February 16.

The British pound also declined 0.17% to 86.72 pence against the euro, its lowest level since April 28.

Investors fear that if Starmer is forced to leave office, he may be succeeded by a more left-leaning leader within the Labour Party, which could lead to higher government borrowing, putting additional pressure on Britain’s already fragile fiscal position and damaging bond and currency markets.

Copper prices surged at their fastest pace in more than a month, moving close to record highs as markets largely ignored the deadlock between the United States and Iran over ending the war and reopening the Strait of Hormuz.

All major metals contracts on the London Metal Exchange rose, after the exchange’s composite metals index closed Friday trading at a new record high. Base metals, from copper to zinc, continue to show notable strength amid signs that demand is outpacing supply.

Copper climbed 2.7% to settle at $13,943 per ton, marking the highest close in its history and surpassing the previous peak of $13,618 recorded on January 29.

Jia Zheng, trading director at China’s Harmony-Win Capital Management, said “the market has moved beyond the impact of the US-Iran war, and copper now has its own independent price trend,” pointing to tight supply conditions and declining inventories in China as the main supportive factors.

Industrial metals also received additional support from strong Chinese exports, with April exports rising 14% year-on-year, particularly clean technology exports that rely heavily on copper.

Citi analysts believe demand linked to the energy transition and defense industries, alongside supply constraints, will support copper prices even if the Strait of Hormuz remains closed for an extended period.

In other metals markets, aluminum rose more than 2%, while nickel gained 1.9%. The closure of Hormuz is affecting Gulf aluminum smelters and nickel producers that rely on sulfur supplies coming from the region.

Morgan Stanley analysts noted that aluminum could continue receiving support if the closure of the strait drags on, especially since restarting smelters requires long periods of time, potentially creating new buying opportunities in the market.

The US dollar extended its gains for a second consecutive session on Tuesday, supported by ongoing uncertainty surrounding the Middle East conflict, which pushed investors toward the dollar as a traditional safe-haven asset.

The dollar had surged sharply in March amid heavy selling of oil-dependent currencies such as the Japanese yen and the euro after oil prices jumped following Iran’s effective closure of the Strait of Hormuz.

However, the dollar retreated again after April 7, the date the ceasefire began, which Donald Trump threatened to end on Monday, describing the Iranian proposal as “nonsense.” The US currency is now approaching its pre-war levels.

Mohit Kumar, economist at Jefferies, said: “A breakthrough before the Trump-Xi summit later this week appears unlikely.”

Trump is expected to arrive in Beijing on Wednesday, where Iran is scheduled to be among the key topics discussed with Chinese President Xi Jinping.

Crude Oil Prices Support the Dollar

Thierry Wizman, global FX and rates strategist at Macquarie Group, said: “As long as crude oil prices remain elevated due to the US blockade on Iranian ports and Iran’s threats against tanker traffic in the Gulf, the dollar will remain strong.”

He added: “The economic damage suffered by the rest of the world from higher oil prices will be far greater than the damage faced by the United States.”

Oil prices rose 2% on Tuesday as hopes for a deal to end the war with Iran continued to fade.

Wizman also noted that the US administration may have concluded that its economic blockade on Iran — or what is being described as “economic warfare” — could prove more effective than resuming airstrikes.

The US Dollar Index, which measures the currency against a basket of major foreign currencies, rose 0.35% to 98.30. The index stood at 97.85 on February 27 before climbing to 100.64 in late March, before falling below pre-war levels again late last week.

Investors are also focused on monetary policy expectations, with the Federal Reserve expected to keep interest rates elevated for longer to combat inflationary pressures, while traders expect the European Central Bank to raise its deposit rate to around 2.75% by year-end from the current 2%.

The euro fell 0.33% to $1.1744.

Attention is now turning toward the US inflation report due later in the session, which is expected to show consumer prices rising 0.6% last month after a 0.9% jump in March, according to a Reuters poll of economists. Forecasts ranged between a 0.4% and 0.9% increase.

The data could strengthen expectations that the Federal Reserve will keep interest rates unchanged in the near term. Traders have now fully priced out rate cuts for this year, compared with expectations for two cuts before the outbreak of the Iran war.

Yen Remains Under Watch

The Japanese yen suddenly jumped late in Tuesday’s Asian session, sparking speculation about a possible “rate check,” which often precedes intervention in the currency market.

The dollar traded at 157.57 yen, up 0.25% on the day, after US Treasury Secretary Scott Bessent expressed strong confidence that Bank of Japan Governor Kazuo Ueda would guide the central bank toward a “very successful” monetary policy.

Japanese authorities are believed to have spent nearly $63.7 billion during the current round of interventions.