- Fear is driving the Crude oil market again.
- The decline in global stocks is making the ‘black gold’ market more vulnerable.
The US dollar retreated as consumer price inflation slowed from 4.2% to 3.5% and core inflation fell from 2.8% to 2.6% in June. The chances of a Fed rate hike in July have fallen from 40% to 17%, while the probability of two rounds of monetary tightening in 2026 has dropped from 58% to 35%. Investors believe that the CPI figures for May marked a peak and that disinflationary trends will continue. Therefore, there is no need for the Fed to raise rates.
Kevin Warsh is sceptical of this view. In his testimony before Congress, he accused the Fed of failing to fulfil its primary mandate. The central bank has failed to bring inflation back to its 2% target for five years, and the new chair intends to rectify this. He advises against focusing on a single inflation report. The escalation of the conflict in the Middle East suggests that it is still too early to speak of a trend.
Brent has risen over four of the last six trading days and has managed to recoup all its June losses during this period. Investors believe that the sharp decline in global stocks is making the market more vulnerable than it was at the start of the conflict in the Middle East. The resumption of the US blockade of the Strait of Hormuz, new sanctions against Tehran and threats to bomb energy infrastructure are heightening the risks of retaliatory action by Iran.
Markets fear the closure of the Bab el-Mandeb Strait, another key global chokepoint, by the Houthis, who are controlled by Tehran. This would further undermine exports from the Gulf states and push Brent above $100 per barrel in the very near future. The Yemeni group is even threatening that oil prices could soar above $200.
Just as at the start of the conflict in the Middle East, Brent is rising on the back of market sentiment. Fears of worsening supply disruptions are outweighing bearish factors, including a decline in global demand led by China, the availability of alternative routes, still substantial global oil reserves and the US’s readiness to boost exports.
Meanwhile, according to API data, US oil stocks have fallen for the 13th consecutive week, albeit at a slower pace than expected. Investors are awaiting figures from the US Energy Information Administration.
The FxPro Analyst Team
