Crude oil futures rallied in midday trading on Wednesday after President Trump declared the ceasefire with Iran over and signaled that further military strikes were imminent.
Front-month West Texas Intermediate crude futures climbed 5.8% to $74.48 per barrel, while Brent futures jumped 6.2% to $78.77/bbl.
Trump, speaking on the sidelines of a NATO summit in Ankara on Wednesday, said an interim agreement to end the Middle East conflict was "over" and warned of further military strikes, reviving geopolitical risk premium in prices and stoking fears of supply disruptions.
The development comes a day after the US Treasury Department revoked a waiver that had permitted Iranian oil exports to resume under the terms of the tentative peace deal reached last month.
Trump also threatened to bomb Iran again and reimpose the US naval blockade of the country's ports and vessels. The US Central Command said on Wednesday that over 20 navy warships are patrolling waters across the Middle East.
Soojin Kim, research analyst at MUFG, said that the latest developments are likely to restore part of the geopolitical premium that had largely unwound in recent weeks, though the broader outlook will depend on whether the conflict escalates further or peace talks resume.
Overnight, the US struck over 80 targets in Iran and moved to revoke a waiver that allowed the sale of Iranian oil in response to Iranian attacks on ships near the Hormuz.
Iran's Islamic Revolutionary Guard Corps, in response, targeted US military sites in Bahrain and Kuwait early on Wednesday.
The retaliatory attacks further undermined the US-Iran ceasefire and dented hopes of translating the memorandum of understanding signed on June 17 into a permanent peace deal to end the conflict.
The General Staff of Kuwaiti Armed Forces confirms that any explosions that may be heard are the result of air defense systems intercepting hostile targets, the Kuwait Army said in a statement on X.
Meanwhile, US commercial crude oil inventories increased by 3 million barrels to 411.4 mmbbls in the week ended July 3, the Energy Information Administration said in its weekly report on Wednesday.
Crude inventories are now about 6% below the five-year average for this time of year, the EIA said.
Aegis Hedging strategists said US crude stocks are now at a deficit of 14.70 mmbbls, or -3.4% to last year, and a deficit of 50.40 mmbbls, or -10.9% to the five-year average.
Gelber & Associates strategists said the rally is sharp because crude had only just fallen back toward pre-war levels amid expectations of rising output, forcing the market to abruptly reprice a conflict that traders had increasingly treated as contained.
Global crude prices are projected to face renewed downward pressure as crude production rebounds and trade flows via the strategic waterway recover following the US-Iran peace deal to end the Middle East conflict, according to the EIA's Short-Term Energy Outlook for July.
The EIA projected that US gasoline prices would average about $3.80 per gallon in Q3, down from over $4.20 per gallon in Q2. The decline is forecast to be driven by lower crude oil prices, which account for the largest share of gasoline production costs.