Oil prices slipped Tuesday and stocks were mixed as investors weighed a report indicating Donald Trump was willing to end the Iran war even if the key Strait of Hormuz remained closed but also threatened to strike its energy infrastructure if it did not make a deal.
The Wall Street Journal cited administration officials as saying the US president and his aides had come to the conclusion that a mission to reopen the waterway would extend the length of the conflict past his four- to six-week timeline.
It added that he had decided to focus on battering Iran's missiles and navy, before looking to pressure Iran diplomatically to reopen the strait.
In a sign Trump will likely face pressure to act to bring crude prices down, the American Automobile Association said US gas prices jumped above an average of $4 a gallon for the first time since 2022 in the aftermath of Russia's invasion of Ukraine.
Equity markets reacted with healthy gains and crude sank soon after the open of business but the early euphoria gave way to ongoing concerns about mixed messaging coming out of the White House.
The story came on the same day the US president threatened to destroy Iran's key oil export hub and desalination plants unless it accepts a deal, while also suggesting diplomacy was making headway.
An Iranian attack that sparked a fire on a fully loaded Kuwaiti oil tanker at Dubai Port also weighed on sentiment.
Both main oil contracts fell almost one percent Tuesday but were both still well above $100 a barrel.
Trump also threatened Monday to destroy Kharg Island, through which most of Iran's crude passes, if a peace deal is not reached.
He warned US forces would destroy "all of their Electric Generating Plants, Oil Wells and Kharg Island (and possibly all desalinization plants!)."
Destroying civilian infrastructure could constitute a war crime, experts say.
Iran has previously threatened to retaliate by targeting energy infrastructure and desalination plants in its Arab neighbours that host the US military, fanning fears of a wider conflict.
But Trump also said officials were speaking to a "more reasonable regime" in Tehran, which has denied any talks and accused the president of lying about negotiations as cover while preparing a ground invasion.
Market experts warned that any US ground operation or wider Iranian retaliation could send oil prices to levels not seen since July 2008, when Brent hit almost $150 a barrel.
Most equity markets also saw reverses.
Seoul, which had soared about 50 percent between the start of the year and beginning of the war, led losses by shedding more than four percent. Tokyo, Shanghai, Singapore, Taipei, Bangkok and Jakarta were also down.
Hong Kong, Sydney, Wellington and Manila rose along with London, Paris and Frankfurt.
Iranian state media reported Monday that a parliamentary commission had approved plans to impose tolls on vessels transiting the Strait of Hormuz.
With Trump flipping between hope for talks and threats, analysts said investors were walking a tightrope.
"The market continues to be headline-driven as the Trump Administration has delivered a variety of messages surrounding de-escalation and re-escalation of the war in Iran," Wolfe Research's Chris Senyek said.
With the war now in its fifth week, governments are moving to shore up their economies.
Economy ministers and central bankers from the G7 club of rich countries met in Paris to discuss the war's effects, with many nations introducing energy-saving measures or cutting fuel taxes to help consumers.
"From here, the burden shifts from military outcomes to economic endurance. The question is no longer how high oil spikes, but how long elevated energy costs bleed into growth, margins, and consumption," said SPI Asset Management's Stephen Innes.
Federal Reserve boss Jerome Powell also provided a little support, saying Monday the bank could look past energy shocks because they "have tended to come and go pretty quickly" but monetary policy changes take time to flow through the economy.
"Developments in the Middle East will, unsurprisingly, continue to dominate the narrative for the time being," Michael Brown at Pepperstone wrote.
"The duration of the conflict (is) set to determine not only the magnitude of the ongoing energy price shock, but also the degree to which upside inflation and downside growth risks eventuate, as well as any potential central bank policy responses," he added.
- Key figures at around 0810 GMT -
West Texas Intermediate: DOWN 0.5 percent at $102.38 a barrel
Brent North Sea Crude: DOWN 0.7 percent at $106.59 a barrel
Tokyo - Nikkei 225: DOWN 1.6 percent at 51,063.72 (close)
Hong Kong - Hang Seng Index: UP 0.2 percent at 24,788.14 (close)
Shanghai - Composite: DOWN 0.8 percent at 3,891.86 (close)
London - FTSE 100: UP 0.6 percent at 10,193.99
Euro/dollar: UP at $1.1472 from $1.1460 on Monday
Pound/dollar: UP at $1.3201 from $1.3183
Dollar/yen: DOWN at 159.66 yen from 159.69 yen
Euro/pound: DOWN at 86.90 pence from 86.93 pence
New York - Dow: UP 0.1 percent at 45,216.14 (close)
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