Oil Hits Seven-year Highs On Recovery Hopes, Unrest

Oil prices hit their highest levels in more than seven years Tuesday, driven in part by hopes of a global economic recovery that would ramp up demand.

Stock markets however headed south, with US Treasury yields surging on expectations the Federal Reserve will have to unveil several interest rate hikes to tackle a worrying spike in inflation, leading the Dow to finish 1.5 percent lower on its first day back after a long holiday weekend.

European crude benchmark Brent North Sea reached $88.13 per barrel, while the US West Texas Intermediate contract hit $85.74 -- the highest levels since October 2014 -- before easing slightly in later trading.

Expectations of Fed tightening continued to support the dollar.

A drone attack on Monday in Abu Dhabi claimed by Yemen's Huthi rebels, which triggered a fuel tank blast that killed three people, also supported prices.

The group warned civilians and foreign firms in the United Arab Emirates to avoid "vital installations," raising concerns about supplies from the crude-rich region.

"The suspected drone attack in Abu Dhabi underscores the ongoing threat against civilian and energy infrastructure in the region amid heightened regional tensions," said Torbjorn Soltvedt at risk intelligence company Verisk Maplecroft.

"Reports of damage to fuel trucks and storage will concern oil market watchers, who are also keeping a close eye on the trajectory of ongoing nuclear talks between the US and Iran," he added.

OANDA analyst Craig Erlam said OPEC nations and other key producers were struggling to meet targets to lift output by 400,000 barrels a month, which added to the upward pressure.

"The evidence suggests it's not that straightforward and the group is missing the targets by a large margin after a period of underinvestment and outages," he noted.

"That should continue to be supportive for oil and increase talk of triple-figure prices."

Hopes for more monetary easing by major consumer China to reinforce its stuttering economy were also seen as a key support for the oil market.

Following an almost uninterrupted rally since the early days of the pandemic, stock markets are showing signs of levelling out as global finance chiefs shift from economy-boosting largesse to measures aimed at reining in inflation.

Those fears drove global bond yields up on Tuesday, with German bund yields coming close to touching zero percent, their highest level since 2019.

"The move higher also raises the prospect that the European Central Bank won't be able to hold its line of no rate rises this year," said CMC Markets analyst Michael Hewson.

Still, equities are expected to enjoy further gains in 2022 as countries reopen and people grow more confident about travel, assuming concerns ease over the Omicron coronavirus variant.

Analysts are also watching the corporate earnings season that is underway, with hopes that firms can match their stellar performances from last year.

Brent crude hit a more than seven-year high on optimism about demand as the global economy recovers Getty Images North America via AFP / DAVID MCNEW

Shares in video game publisher Activision Blizzard, maker of blockbuster titles including "Call of Duty", closed 25.9 percent higher after Microsoft announced a $69 billion buyout.

Shares in Microsoft slid 2.4 percent by the end of trading.

"This is a big step up with Microsoft getting in on the ground floor when it comes to creating as well as overseeing content on its own gaming platform," said Hewson.

Microsoft's Xbox console makes it a major player in the gaming industry, even if it trails far behind Sony's PlayStation.

Brent North Sea crude: UP 1.2 percent at $87.51 per barrel

West Texas Intermediate: UP 1.9 percent at $85.43 per barrel

New York - DOW: DOWN 1.5 percent at 35,368.47 (close)

New York - S&P 500: DOWN 1.8 percent at 4,577.11 (close)

New York - Nasdaq: DOWN 2.6 percent at 14,506.90 (close)

London - FTSE 100: DOWN 0.6 percent at 7,563.55 (close)

Frankfurt - DAX: DOWN 1.0 percent at 15,772.56 (close)

Paris - CAC 40: DOWN 0.9 percent at 7,133.83 (close)

EURO STOXX 50: DOWN 1.0 percent at 4,257.82 (close)

Tokyo - Nikkei 225: DOWN 0.3 percent at 28,257.25 (close)

Hong Kong - Hang Seng Index: DOWN 0.4 percent at 24,112.78 (close)