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Oil surged past $125 to its highest since the Middle East conflict began as fears mounted of a prolonged disruption to global energy supplies.
Brent crude, the international benchmark, jumped as much as 7 per cent to above $126.41 a barrel before falling back to $123.50. The rise follows a 6.1 per cent gain on Wednesday.
US oil prices were 2.3 per cent higher at $109.32 a barrel, after a 7 per cent jump on Wednesday.
The surge follows indications by Donald Trump on Wednesday that he would keep blockading the vital Strait of Hormuz until Iran agreed a deal to end its nuclear programme.
Axios also reported later on Wednesday that US military commanders were set to brief the president on Thursday on a plan for a “short and powerful” wave of strikes on Iran, in an effort to force Tehran to accelerate peace talks.
“The oil market has moved from over-optimism to the reality of the supply disruption we are seeing” in the Gulf, ING analysts wrote in a note to clients.
Rising energy prices have added to pressure on the borrowing costs for governments across Asia, the region most exposed to the Hormuz disruption.
Japanese assets came under the most selling pressure on Thursday, with stocks and bonds falling and the yen trading near levels where authorities have previously intervened.
The benchmark Topix led losses in Asia, falling 1.5 per cent, while yields on Japanese 30-year government bonds rose 0.06 percentage points to 3.7 per cent. Bond yields move inversely to prices.
The yen traded around ¥160.40, at levels where Japanese authorities have previously verbally intervened. The currency briefly hit ¥160.47 during late US trading on Wednesday.
“Asian markets are really taking it on the chin at the moment,” said Mitul Kotecha, head of emerging markets macro strategy at Barclays.
On Wednesday, the Bank of Japan held interest rates steady at 0.75 per cent despite higher energy prices adding to inflationary pressures in the country.
Despite higher energy prices, S&P 500 futures rose 0.1 per cent, while the tech-focused Nasdaq futures were 0.4 per cent higher. Bumper earnings in the US this week have helped buoy megacap technology stocks, with Google owner Alphabet up 7 per cent in after-market trading.
In Taiwan the Taiex index gained 0.5 per cent as investors continued to drive up companies exposed to AI demand.
“Equities are clearly disconnected from all this,” Barclays’ Kotecha said. “The tech and AI euphoria has picked up again and is ignoring it.”
Higher energy prices have put the most pressure on government bonds in south and south-east Asian countries that have lower energy reserves and less fiscal and monetary space to shield end consumers from higher prices.
Yields on 10-year government bonds in India are now at 6.99 per cent while the rupee weakened to a record low against the dollar in early trading.
In the US, yields on 30-year Treasuries were steady at 5 per cent while the 10-year bond traded flat at 4.42 per cent. The dollar traded flat against a basket of key trading partners.
Gold edged up 0.5 per cent to $4,570 an ounce, while Bitcoin advanced to about $75,750.
Later on Thursday the European Central Bank and the Bank of England will announce interest rate decisions, followed by US economic data.