San Francisco Frontiers - Oil extends gains and stocks drop as Iran conflict spreads

The attack on the Islamic state has upended regional energy flows, with the crucial Strait of Hormuz -- through which about a fifth of global oil transits -- effectively closed off, fuelled fears of a fresh energy crisis that could ramp up inflation.

Market moves have been comparatively mild in light of the conflict amid hopes that the crisis will be short-lived and not cause a major problem for the global economy.

But analysts warned that the longer it goes on the more painful it would be on the global economy as supply chains are hit and prices surge.

US President Donald Trump said the war, which began Saturday with a strike that killed Iran's supreme leader Ayatollah Ali Khamenei, was going "substantially" ahead of schedule but that it could go on for more than four weeks.

He also for the first time laid out objectives -- destroying Iran's missiles, navy and nuclear programme, and stopping its support for armed groups across the region -- which notably did not include toppling the Islamic republic.

The US State Department urged Americans to leave all of the Middle East from Egypt eastward.

Iran has responded by unleashing missiles and drones across the Middle East, including Lebanon, Saudi Arabia, Qatar and Dubai, while threatening explicitly to drive up global energy costs.

That sent oil prices soaring nearly 14 percent Monday before easing slightly, while European natural gas prices spiked almost 40 percent after Qatar's state-run energy firm said it had halted liquefied natural gas production.

Meanwhile, a general in Iran's Revolutionary Guards threatened to "burn any ship" seeking to navigate the Strait of Hormuz.

"We will also attack oil pipelines and will not allow a single drop of oil to leave the region. Oil price will reach $200 in the coming days," he warned.

Crude rose at least one percent on Tuesday, and the rise in energy costs could give most central bankers a headache as they look to bring down inflation while also cutting interest rates to support their economies.

"A spike in energy prices creates a dilemma for central banks," said Rodrigo Catril at National Australia Bank. "Stagflation makes central banks very uncomfortable, a longer-lasting energy shock is inflationary and at the same time it weakens growth.

"When in doubt, the best course of action is to wait and we are seeing a bit of that in terms of central banks' pricing expectations."

And Chris Weston at Pepperstone added: "With the Strait of Hormuz temporarily constrained, the longer the disruption persists, the greater the risk that additional facilities and infrastructure across the Gulf region may be forced offline.

"Gulf producers do have storage capacity, pipelines, and tanker alternatives, but these are not unlimited."

Equity markets mostly retreated to extend losses in most of Asia Monday.

Seoul, which has surged more than 40 percent this year on the back of a tech rally, sank more than two percent as investors returned from a long weekend.

Tokyo, Hong Kong, Shanghai, Sydney, Wellington, Taipei and Jakarta were also sharply lower.

Airlines were again among the biggest losers, with Tokyo-listed Japan Airlines down more than five percent, Cathay Pacific down 3.3 percent in Hong Kong and Qantas losing nearly three percent in Sydney.

- Key figures at around 0230 GMT -

West Texas Intermediate: UP 1.0 percent at $71.95 per barrel

Brent North Sea Crude: UP 1.2 percent at $78.70 per barrel

Tokyo - Nikkei 225: DOWN 2.3 percent at 56,727.27 (break)

Hong Kong - Hang Seng Index: DOWN 0.4 percent at 25,962.03

Shanghai - Composite: DOWN 0.8 percent at 4,150.87

Euro/dollar: UP at $1.1701 from $1.1688 on Monday

Pound/dollar: UP at $1.3415 from $1.3399

Dollar/yen: UP at 157.40 yen from 157.31 yen

Euro/pound: DOWN at 87.22 pence from 87.23 pence

New York - Dow: DOWN 0.2 percent at 48,904.78 (close)

London - FTSE 100: DOWN 1.2 percent at 10,780.11 (close)

S.Jackson--SFF