The Brent crude oil price hit a four-year high of US$114 per barrel today after the US and Iran exchanged fire in the Strait of Hormuz.
This follows the US announcing it would escort commercial ships from nations uninvolved in the conflict through the critical waterway.
Iranian drones hit South Korean and United Arab Emirates (UAE) vessels, as well as the UAE's Fujairah oil terminal, causing a large fire.
ASX 200 energy shares are leading the market today, up 1.3%, due to the correlation between a rising Brent crude oil price and earnings.
However, the market is also aware that rising energy costs may lead to resurgent global inflation and higher interest rates.
This is contributing to a 0.6% fall for the S&P/ASX 200 Index (ASX: XJO) as the market braces for the Reserve Bank's next interest rate decision at 2.30pm on Tuesday.
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No end in sight
The Strait of Hormuz, through which about 20% of the world's gas and oil supply is shipped, remains effectively shut down.
The Brent crude oil price has lifted 12% over the past week. West Texas Intermediate (WTI) crude is up 9% to US$105 per barrel.
US gas prices have also lifted 10% over the week. US heating oil prices are up 4% and European gas prices have increased 9%.
Trading Economics analysts said Middle East tensions have intensified sharply over the past 24 hours.
They commented:
The US and Iran exchanged fire in the Strait of Hormuz, raising uncertainty over the durability of the four-week ceasefire.
US forces repelled Iranian attacks while escorting two US-flagged vessels through the strategic waterway, stating they had "defended all commercial ships" from drones and small boats deployed by Tehran.
CBA senior economist Ryan Felsman said the four-week-old ceasefire between the US and Iran was now in jeopardy.
Overnight, gold futures fell "as Middle East risks pushed the US dollar higher and kept inflation fears in focus", he said.
Interest rates in Australia
CBA expects the Reserve Bank to raise interest rates for a third consecutive month today.
Felsman said:
We expect the RBA to lift the cash rate 25bp at their meeting … to 4.35%. However, the decision will be finely balanced.
We anticipate another split vote with the softer March trimmed mean CPI print and recent falls in sentiment surveys strengthening the case to the leave the cash rate unchanged and wait to see how the data evolves.
Those arguing for a hike, by contrast, will focus on inflation being persistently too high, a labour market that remains too tight and rising cost pass through from the war in Iran
The market is pricing in a 74% chance of an interest rate rise today.
What's happening with ASX 200 energy shares?
At the time of writing, the Woodside Energy Group Ltd (ASX: WDS) share price is up 2.2% to $32.83.
The Santos Ltd (ASX: STO) share price is up 0.7% to $7.97.
The Ampol Ltd (ASX: ALD) share price is 1.5% higher at $35.80.
The Viva Energy Group Ltd (ASX: VEA) share price is up 1.7% to $2.46.
Karoon Energy Ltd (ASX: KAR) shares are up 2.9% to $2.14 apiece.
The Beach Energy Ltd (ASX: BPT) share price is 1.9% higher at $1.17.
