Crude oil prices rose sharply by more than 2.5% on Monday, as the standoff between the US and Iran, Tehran’s renewed threats of escalation in the Strait of Hormuz, and the hardline rhetoric of US President Donald Trump intensified concerns over global crude supplies.

Brent futures rose by $2.35, or 2.65%, to close at $90.87 a barrel. US West Texas Intermediate (WTI) rose by $2.10, or 2.55%, to $84.50 a barrel.

At the center of the market’s attention is the prospect of negotiations between Washington and Tehran, as the 60-day deadline set under the June 17 memorandum of understanding expired on Monday. The agreement provided for the reopening of the Strait of Hormuz, while the two sides would simultaneously negotiate a final agreement on Tehran’s nuclear program.

However, prospects for a diplomatic breakthrough appear extremely limited.

Iranian Foreign Ministry spokesperson Esmail Baghaei ruled out talks on extending the memorandum of understanding, according to the state-run Tasnim news agency.

“We did not even begin negotiations, and the US violated the agreement from the outset. Therefore, the issue of the 60 days is irrelevant,” Baghaei said.

At the same time, President Donald Trump said that the United States was not seeking an extension of the memorandum of understanding with Iran, while telling reporters that Tehran was unlikely to accept the kind of agreement he considers necessary.

The escalation in rhetoric from both sides has increased concerns that the diplomatic window is closing, with immediate consequences for the energy market.

Iran warns it is moving to the offensive

A senior Iranian official told Reuters that Tehran is ready to change strategy, moving from defense to offense if diplomacy with the US fails.

Iran will escalate tensions in the Strait of Hormuz and the wider region and launch an attack if Washington does not fully implement the interim agreement within a matter of weeks.

“Iranian entities must be prepared to escalate tensions in the Strait of Hormuz and the wider region, as Iran will be ready to make decisions and take action on difficult decisions,” the official told Reuters.

The Iranian official also said that Tehran is losing confidence in the value of diplomacy with Washington, raising concerns that the confrontation could enter a new phase.

Trump, for his part, escalated his rhetoric even further, effectively demanding Tehran’s surrender.

“Iran should raise the white flag of surrender,” he said in a telephone interview with Fox News.

He also issued a threat against Oman, which has played a mediating role in efforts to manage traffic through the Strait of Hormuz.

“If Oman gets in the way, we will bomb them mercilessly,” the US president said.

Traffic through Hormuz is almost “frozen”

The developments have taken on even greater significance for the oil market because of the dramatic decline in shipping through the Strait of Hormuz. Before the US-Israeli attacks on Iran began in late February, roughly one-fifth of the world’s oil and LNG supplies passed through the strait.

According to Kpler data cited by Reuters, only five cargo vessels crossed the strait on Saturday, while no such passage was recorded on Sunday. The previous weekend, 31 vessels had passed through.

Other Kpler data cited by CNBC, covering overall traffic, show that only three vessels crossed the strait on Sunday, indicating that commercial traffic is approaching a complete standstill.

“As the rhetoric rises, so do prices,” said Phil Flynn, senior analyst at Price Futures Group, noting that uncertainty over vessels’ ability to pass through Hormuz is increasing market concerns.

Both major oil contracts had already gained more than 5% the previous week following attacks on tankers operated by ADNOC in the Strait of Hormuz and on a Saudi Aramco refinery.

The $100 scenario

The market is now facing two very different scenarios. On the one hand, a diplomatic solution that would allow the Strait of Hormuz to reopen could trigger a sharp decline in prices. On the other, a deeper disruption to flows could push Brent significantly higher.

Bjarne Schieldrop of SEB Research estimates that prices are unlikely to move much higher unless current overnight crude flows through Hormuz also stop or the Bab el-Mandeb Strait is closed.

However, Bob McNally, president of Rapidan Energy, believes Brent is likely to move back toward $100 a barrel, as another crucial factor could shift the market balance: China.

According to McNally, Beijing has reduced its imports by 4 to 5 million barrels per day, a development that has played a crucial role in preventing an even sharper surge in international prices during the war with Iran.

The situation could change, however, if China allows its refineries to increase imports again in order to take advantage of high refined-product prices.

“China exiting this drastic cut in imports is not compatible with stable Brent prices,” the analyst warned.

Iran under “economic strangulation”

US Energy Secretary Chris Wright argued that Trump has the time to wait until sanctions and the oil embargo place even greater pressure on Tehran.

“I think so. The President is playing the long game,” he said on Fox News.

“Iran cannot export any oil at the moment. That is part of the economic strangulation we are imposing on it. But the world does not need Iranian oil,” he added.

At the same time, Gulf producers are seeking alternative ways to maintain their exports. ADNOC has sold at least 14 million barrels of spot crude to Asian refineries, while Saudi Aramco is offering some Asian customers cargoes for delivery outside the Strait of Hormuz.

US strategic reserves at their lowest level since 1982

Additional pressure on the market is coming from the continued decline in US strategic reserves. Crude oil stocks in the Strategic Petroleum Reserve fell by approximately 5.3 million barrels last week, to 293.4 million barrels, according to the US Department of Energy.

This is the lowest level since December 1982, with the releases forming part of an agreement to make a total of 172 million barrels available from the US strategic reserve.

Wright also said he would speak with US refineries about ways to increase fuel production, as the administration seeks to bring down gasoline prices, which have remained persistently high since the start of the war.

US refineries, however, are already operating at high rates, as elevated fuel prices have boosted their profit margins.