Brent is following a path of demands rather than commitments

• A deal to reopen the Strait of Hormuz is not inevitable.
• Oil prices are rising amid growing risks of an escalation of the conflict in the Middle East.

The US dollar continued to recover from losses caused by the jobs report, against a backdrop of rising geopolitical tensions in the Middle East with traders squaring positions ahead of key US inflation figures. Consumer prices are expected to rise by 0.1% and core CPI by 0.2% m/m, indicating a move towards the Fed’s target and lowering the risk of rate hikes. That could be another blow to the greenback.

The conflict in the Middle East could cause a correction in consumer price trends. Previous forecasts by FOMC officials, who were banking on the federal funds rate remaining unchanged, assumed that the conflict would soon end. However, everything is heading towards a further escalation. Iran has demanded reparations, the withdrawal of US troops from the region, the lifting of sanctions and the return of frozen assets. In response, the US has set out its own onerous conditions. If the opposing sides continue to make new demands rather than commitments, the rally in Brent is likely to continue.

According to Capital Economics, North Sea crude will trade in the range of $80–90 per barrel, as a deal to reopen the Strait of Hormuz is not a foregone conclusion. Until there is a clear change to the status quo, Brent is set to consolidate. Meanwhile, drone attacks on oil infrastructure in Saudi Arabia and Libya are heightening the risk that the US will be forced to respond.

Brent’s fourth rise over the last five days is also driven by an increase in the intensity of Ukraine’s attacks on Russian oil refineries. This is pushing up petrol and diesel prices, boosting demand for crude oil and leading to higher futures prices.

The closure of the Strait of Hormuz, problems with the alternative oil supply route via the Red Sea, the gradual increase in Chinese demand and the reduction of global stocks to critical levels are creating a bullish market environment for crude oil. This heightens the risks of accelerating inflation in the US, pushes up Treasury bond yields, increases the likelihood of a federal funds rate hike and strengthens the US dollar.

The FxPro Analyst Team