Oil prices rose as the Middle East crisis escalated on Monday with US President Donald Trump threatening to destroy Iran's main export terminal, and after the entry of Yemen's Houthi rebels into the war.

European stocks rose but Wall Street's major indexes closed mostly lower as markets cast a wary eye on Trump's comments about negotiations to end the fighting.

Trump expressed confidence that a negotiated settlement would soon be reached but warned that if it was not – or if Iran continued to block the Strait of Hormuz to most sea traffic – US forces would blow up Kharg Island and all of Iran's oil wells and electricity generation.

Brent North Sea crude, the international benchmark, jumped to almost US$117 per barrel early in the session before closing at US$112.78.

West Texas Intermediate gained 3.3 percent to US$102.88 a barrel, closing above US$100 for the first time since the war started.

US stocks started the day in partial "rally mode" as Trump "made a comment that was meant to be taken positively," said Sam Stovall of CFRA Research.

"But Wall Street has learned by now that you really don't believe everything you read," he added, noting that markets still have room to decline further before bouncing back.

IG analyst Chris Beauchamp said the impact of Trump's statements is weakening.

"Until investors are treated to the sight of senior US officials physically getting on a plane to Pakistan to negotiate, investors will become more sceptical," he said.

Briefing.com analyst Patrick O'Hare compared the situation to an intersection where the traffic light is flashing all colours at once.

Equity investors took their cue initially from the "green light" of Trump indicating that serious discussions are underway to end the war, he said.

But oil markets were swayed by the red light of Trump's threats to destroy Iran's oil fields and export terminal. There were also reports that the United States is readying ground troops, he noted.

As the war entered its fifth week, the spectre of a widening conflict grew as Houthi rebels said on Saturday they fired "a barrage of cruise missiles and drones" at strategic sites in Israel.

"The Houthis' ability to disrupt shipping through the Bab al-Mandeb strait, which accounts for roughly 12 percent of global trade, is the new key risk," said Pepperstone analyst Chris Weston, referring to the waterway between Yemen and the Horn of Africa.

The Nasdaq fell 0.7 percent, to 20,794, the S&P 500 fell 0.4 percent, to 6,343, while the Dow rose 0.1 percent, to 45,216. (AFP)



Edited by Cecil Wong