- It wasn’t just the US and China that contributed to the fall in oil prices.
- Traders bet that Trump always chickens out.
The US dollar quickly recouped some of its losses as markets began to doubt the effectiveness of the US-Iran deal. Each side is presenting the agreement as a victory for itself, and the disagreements remain. Uncertainty is once again working in favour of the greenback, whilst the rally in stock indices and the fall in oil prices are pulling it in the opposite direction.
Brent’s decline to its lowest levels since early March leaves a mixed impression. On the one hand, Morgan Stanley and Goldman Sachs’ downward revisions to North Sea crude forecasts to $80 per barrel in the fourth quarter suggest that geopolitical risks are receding into the background. On the other hand, investors were confident that, even after the deal is concluded, oil prices would not quickly return to pre-war levels.
Restoring the Gulf states’ damaged infrastructure will take months. A rapid return of the Strait of Hormuz to full capacity seems unlikely. The Kalshi betting market believes this will not happen before early August. Global oil reserves are close to critical levels. US strategic reserves have plummeted to a near-record low of 340 million barrels.
Before the conflict in the Middle East, a blockade of the Strait of Hormuz was considered an apocalyptic scenario. In 2022, amid events in Ukraine, Brent soared to $137 a barrel amid fears that Russia, which exports 7.5 million barrels a day, would be cut off from the market. In the case of the world’s key oil artery blockade, the figure was twice as high, yet Brent crude rose only to $120.
Undoubtedly, China’s 29% drop in May imports to an eight-year low, record US exports, the depletion of global stocks, and a decline in global demand due to high prices all played a part. However, one must not underestimate TACO trading or the likelihood that Trump always chickens out. It was precisely this that prevented Brent from soaring when the US resumed bombing Iran.
The White House talks a lot about peace, but for now, the deal appears to be a strategic retreat. The Americans’ military objectives remain unmet. Will the fading of TACO help oil find its bottom?
The FxPro Analyst Team
