Oil Surges Above $110, Gold Plummets as UAE Nuclear Plant Attack Escalates Iran War

Oil prices surged to their highest levels in nearly two weeks on Monday, May 18, as a drone strike on the United Arab Emirates' Barakah nuclear power plant triggered a sharp escalation in Middle East tensions. Brent crude futures climbed 1.32% to $110.70 per barrel, while West Texas Intermediate (WTI) crude jumped 1.75% to $107.26 per barrel by late Asian trading hours.

The attack marks a dangerous new phase in the ongoing U.S.-Israeli conflict with Iran, with UAE officials describing the strike as a "terrorist attack" and reserving the right to respond. President Donald Trump is expected to meet with senior national security advisers on Tuesday to discuss possible military action against Iran, according to multiple reports.

Gold Crashes to Six-Week Low as Dollar, Yields Dominate

While oil surged on geopolitical risk, gold prices plummeted in a counterintuitive move that underscores the complex dynamics gripping global markets. Spot gold (XAU/USD) fell to $4,536.45 per ounce—its lowest level since March 30—as rising U.S. Treasury yields and a strengthening dollar overwhelmed traditional safe-haven demand.

COMEX gold futures dropped 1.18% to $4,508 per ounce, while silver futures plummeted 2.7% to $75.455 per ounce in early Monday trade. The selloff extends a brutal week for precious metals, which saw gold decline nearly 4% last week as cpi" title="Understanding inflation and CPI in forex">inflation fears triggered a bond market rout.

The 10-year U.S. Treasury yield surged to 4.58%, up 23 basis points from the previous week, while 30-year yields remained above 5%. Higher yields make non-yielding assets like gold less attractive to investors, particularly when the dollar is strengthening simultaneously.

Strait of Hormuz Remains Key Flashpoint

The escalation comes as the Strait of Hormuz—a critical chokepoint for nearly one-fifth of global oil and liquefied natural gas shipments—remains heavily restricted amid ongoing tensions. Fresh drone attacks targeting both the UAE and Saudi Arabia have added to fears of a wider regional conflict.

Iranian Foreign Minister Abbas Araqchi said on Friday that Tehran has "no trust" in the United States and would only return to negotiations if Washington demonstrated seriousness. The minister added that Iran remained prepared for both renewed conflict and diplomatic engagement.

President Trump said he was "running out of patience" with Iran and had agreed with Chinese President Xi Jinping that Tehran must not be allowed to develop a nuclear weapon and should reopen the Strait of Hormuz. Despite a ceasefire technically remaining in place, hopes for a quick resolution have diminished sharply.

Markets Face "Race Against Time" Scenario

Morgan Stanley analysts described the oil market as being in "a race against time," warning that the factors preventing a sharper spike in crude prices could weaken if the Strait of Hormuz remains shut into June.

"Despite disruptions affecting almost 1 billion barrels of oil supply, crude prices are still below the peaks seen in 2022 following Russia's invasion of Ukraine," analysts led by Martijn Rats noted. "The market entered the current crisis with stronger supply buffers, while investors still largely expect the strait to reopen eventually."

However, Morgan Stanley cautioned that an extended closure of Hormuz could tighten global supplies again if disruptions continue beyond what China or the United States can comfortably absorb through strategic reserves and alternative export routes.

Fed Rate Hike Odds Climb as Energy Shock Fuels Inflation Concerns

The surge in oil prices has dramatically reshaped the interest rate outlook, with markets now pricing in nearly a 50-50 chance of another Federal Reserve rate hike this year. The shift represents a major reversal from just two weeks ago, when traders were still betting on potential rate cuts in the second half of 2026.

The U.S. Dollar Index ($DXY) has benefited from the hawkish repricing, climbing above 99.28 last week after April CPI data printed at 3.8%—well above the Fed's 2% target. The dollar's strength has weighed heavily on precious metals and commodity-linked currencies.

EUR/USD fell to 1.1617 last week, its lowest level in over a month, while analysts warned that the euro is "threatening to break lower" if dollar strength persists. GBP/USD has similarly come under pressure, testing support near 1.3500 as markets reassess the Bank of England's rate trajectory.

Currency Market Implications

The diverging price action between oil and gold has created unusual cross-currents in currency markets. Commodity-linked currencies like the Canadian dollar and Norwegian krone are benefiting from higher energy prices, while safe-haven currencies like the Japanese yen are struggling against the surging U.S. dollar.

USD/JPY continues to grind toward the 158.00 intervention threshold, with the 300-basis-point rate differential between U.S. and Japanese yields providing persistent upward pressure on the pair. Japanese authorities have warned against "excessive" yen weakness but have not yet intervened since their May operations.

What Traders Should Watch

Key levels and catalysts to monitor in the coming sessions:

• Brent crude: Resistance at $112 (May 5 high), support at $108
• Gold (XAU/USD): Critical support at $4,440, resistance at $4,600
• EUR/USD: Support at 1.1600, break risks accelerating to 1.1500
• 10-year Treasury yield: Watch for break above 4.60%, which could trigger fresh gold selling
• FOMC minutes (Wednesday): April meeting minutes will reveal debate behind historic four dissents
• S&P Global flash PMI data (Thursday): First major economic release of the week

Outlook: Energy Shock vs. Monetary Tightening

Markets face a complex balancing act in the coming weeks. The oil-driven inflation shock is forcing central banks to reconsider their easing bias, even as surging energy costs threaten to slow economic growth. This stagflationary dynamic—rising prices amid weakening demand—historically creates challenging conditions for both equities and fixed income.

Saudi Aramco CEO Amin Nasser warned last week that disruptions to shipments through Hormuz could delay stability returning to oil markets until 2027, potentially impacting around 100 million barrels of supply every week. Such an extended disruption would represent one of the most significant energy shocks in modern history.

For now, the dollar remains king as investors prioritize yield over safety. But if the Iran conflict escalates further—particularly if the U.S. takes direct military action in response to the UAE nuclear plant attack—markets could see a sharp repricing of geopolitical risk that finally pushes gold back into its traditional safe-haven role.

Traders should remain nimble and prepare for elevated volatility across asset classes as the twin forces of energy supply disruption and monetary policy uncertainty collide.