Oil Prices, Interest Rates and the Iran War

In late June, West Texas Intermediate (WTI) crude oil traded at $68 per barrel. Market conditions were relatively stable, reflecting optimism that a brief ceasefire and the reopening of the Strait of Hormuz might contain the conflict between the United States and Iran. At the time, national gasoline prices averaged approximately $3.91 per gallon.

The renewed escalation began on July 7 and 8, when the United States and Iran exchanged additional airstrikes, which have continued ever since. By July 24, WTI crude oil was trading at $89 per barrel, representing an increase of approximately 29% from the beginning of the month.

Consumers have already felt the impact. By July 20, national gasoline prices reached $4.13 per gallon. Additional increases are possible as changes in crude oil prices generally take time to work through refining, distribution and retail gasoline markets.

The Strait of Hormuz is among the world’s most important oil transit routes. A meaningful portion of global petroleum supply passes through the strait each day. Even the threat of disruption can raise oil prices because buyers must account for potential shortages, shipping delays, higher insurance costs and longer transportation routes.
In addition to rising oil prices, interest rates have also increased. The 10-year Treasury yield was 4.4% in late June and rose to 4.65% by July 24. While the magnitude of the change isn’t particularly noteworthy, the short period of time over which it occurred is. The overall rise in interest rates this year has resulted in bond returns that are flat to slightly negative, well below analyst expectations set at the beginning of 2026. It appears that the primary factor causing interest rate increases is fear of higher inflation due to elevated oil prices, despite the June Consumer Price Index registering 3.5%, a sequential decline from 4.2% in May and below expectations.

The concern is that persistent inflation above 4% generally represents economic risk, including: purchasing power erosion, headwinds for the stock market and the risk that higher prices become embedded in supply chains. Our current view is that inflation will remain between 3.5% and 4% by the end of 2026, assuming the administration can bring an end to a war that is generally unpopular with the American people during a midterm election year. In addition, long-term inflation expectations in the markets remain anchored near 2.4%, which leads us to believe that the conflict in Iran and elevated oil prices are likely to be relatively short-lived.

The key point is that the increase in oil prices has not primarily resulted from stronger economic growth or accelerating global demand. Instead, it has been driven by geopolitical disruption and the risk of supply interruption.

Oil markets may reverse quickly if diplomatic progress emerges or shipping routes reopen. For now, however, the market is responding rationally to a conflict that has expanded in geography, duration and economic significance.

Takeaways For the Week:

• A resurgence in hostilities involving Iran has again driven up oil prices, which in turn has contributed to rising interest rates due to short-term inflation fears
• Long-term inflation expectations have remained well anchored, as the disruption in oil supply is viewed as relatively short-term

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The views expressed represent the opinion of Ferguson Wellman. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Statements of future expectations, estimates, projections and other forward-looking statements are based on available information and Ferguson Wellman’s views as of the time of these statements. Past performance may not be indicative of future results. Ferguson Wellman, Octavia Group and West Bearing do not provide tax, legal, insurance or medical advice. This material has been prepared for general educational purposes only and not as a substitute for qualified counsel who can determine how this information applies to you. We believe the information provided is from reliable sources but should not be assumed accurate or complete.

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