Red Sea Oil Shock Sends Crude Soaring as Saudi Exports Slump 33%

Bond Yields Surge, Oil Jumps More Than 6%

Middle East Shock Knocks Kospi Back Below 7,000

Renewed inflation fears sent long-term government bond yields sharply higher across the US, Japan, the UK and France.

The yield on the 10-year US Treasury jumped 0.125 percentage point to 4.969% on September 10, the highest since October 2023. On the same day, 10-year government bond yields in the UK, Germany and France rose 0.115 percentage point, 0.053 percentage point and 0.107 percentage point, respectively. Japan’s 10-year government bond yield also rebounded to 3.0% in intraday trading on September 11.

Investors are betting that persistently high energy prices will fuel inflation and keep central banks on a tightening path. Front-month West Texas Intermediate and Brent crude futures both climbed more than 6% on September 10.

That weighed on equities. South Korea’s Kospi index closed down 124.01 points, or 1.76%, at 6,909.91 on September 11, falling back below 7,000 on a closing basis after three trading days.

Middle East War Shows Signs of Dragging On as Yields and Oil Surge

Houthi Threat Disrupts Oil Shipments; Saudi Output Falls 23% in a Month

Inflationary developments rippled across global markets on September 10. Saudi Arabia said its crude exports and production plunged in August, while the European Central Bank raised interest rates. In the US, August producer prices came in above estimates, and President Donald Trump floated a $5,000 cash dividend plan for every American. Together, those factors pushed long-term bond yields higher and fueled concern that high oil prices and high interest rates could become the new normal for an extended period.

Oil Market Hit by Houthi Threat

Brent crude for November settlement, the global benchmark, closed up $6.42, or 6.34%, at $107.63 a barrel on London’s ICE Futures Europe exchange on September 10. In New York, West Texas Intermediate futures for October delivery settled up $6.43, or 6.69%, at $102.48 a barrel on the New York Mercantile Exchange. Both contracts closed at their highest levels since May 19. Brent has risen for five straight sessions, while WTI has advanced for eight.

Oil prices were lifted by news that Saudi crude exports dropped sharply amid shipping disruptions in the Red Sea. Saudi Arabia’s crude exports fell to 3.03 million barrels a day in August, down about 33% from July, according to an OPEC report. Output totaled 6.23 million barrels a day, down 23% from a month earlier.

The disruption has been linked to a rising threat from Yemen’s Iran-aligned Houthi rebels around the Bab el-Mandeb Strait, a key passage linking the Red Sea and the Indian Ocean. The Houthis on September 10 seized the major Red Sea coastal city of Mocha and the strategically important Hanish Islands, putting them on the verge of controlling the strait. Saudi crude exports could fall further in September.

Inflation Fears Re-Emerge

The bond market also came under pressure after the US August producer price index report. Producer prices rose 5.4% from a year earlier, slightly above the 5.3% market consensus. The increase also accelerated from 4.7% in July. That reinforced the view that inflation pressures remain alive and triggered more bond selling.

A US Treasury buyback of long-dated government bonds, aimed at easing yields, also fell short of its target. The Treasury bought back only $5.2 billion, below its $6 billion goal, after accepting only offers close to market prices.

The ECB’s quarter-point rate increase and signal that further hikes remain possible also added pressure on US Treasury yields, which move inversely to prices. Trump’s pledge a day earlier to give Americans $5,000 if Republicans win the midterm elections further fueled concern over a wider fiscal deficit and higher inflation.

With oil moving toward $110 a barrel, inflation fears intensified and government bond prices fell across major markets. At the close on September 10, the 10-year US Treasury yield stood at 4.969%, the highest since October 2023. The 30-year yield also rose 0.075 percentage point to 5.368%. Ten-year government bond yields in the UK, Germany and France climbed between 0.053 percentage point and 0.115 percentage point, while Japan’s 10-year yield returned to the 3% range.

Could High Oil and High Rates Become the New Normal?

Market conviction is growing that elevated oil prices and interest rates will persist for a prolonged period. A key reason is the fading prospect of an early end to the war in the Middle East. Jim Burkhard, vice president at S&P Global Energy, said the oil market is settling into a new normal of higher prices.

Expectations have also strengthened that the Federal Reserve will raise interest rates on September 16. The probability of a quarter-point increase rose to 69.6%, according to CME Group’s FedWatch tool.

High oil prices and high rates are also expected to weigh on the real economy and stock markets. The Wall Street Journal recently said the US 10-year Treasury yield affects borrowing costs across mortgages, student loans and corporate debt, and that higher bond yields tend to cool sentiment in equity markets.

Hwang Jung-su in New York / Choi Man-su in Tokyo / Lee Hye-in, reporter hjs@hankyung.com