Oil Pulls Back After Strong Gains 🚩 Markets Assess the Strait of Hormuz Impasse

Oil prices remain highly sensitive to developments in the Middle East, where negotiations aimed at securing shipping through the Strait of Hormuz have reached an impasse. However, the market remains responsive to any headlines suggesting a potential “deal” and an easing of restrictions on tanker traffic through the Strait. Brent is gradually giving back part of its recent surge and is trading near $87 per barrel, while WTI is around $81, following the earlier sharp increase, with the latest media reports suggesting that Oman and Iran may be close to finalizing negotiations emerging as the main catalyst. Nevertheless, the market remains in a kind of “grey zone”: oil continues to flow through the Strait, but the persistent risk of disruption keeps the geopolitical premium elevated. In our view, a continued stalemate in the Strait of Hormuz remains the base-case scenario for the coming weeks, although the risk of escalation from the US is likely to decline as the political cycle moves closer to the autumn midterm elections.

Hopes for a Hormuz Deal Cool Oil Prices

Oil prices surged yesterday, with Brent approaching $87.50 per barrel after gaining nearly 5%, as markets grew increasingly concerned about a prolonged impasse surrounding the Strait of Hormuz. The situation began to shift rapidly, however, following reports that talks between Oman and Iran had entered an “advanced stage” and that the prospects for a peaceful outcome between the US and Iran were improving. Markets therefore started to price in de-escalation, reducing some of the geopolitical premium previously embedded in crude prices.

• Oil prices fell below $88 per barrel in response to reports of progress in the negotiations.
• A potential agreement could reduce the risk of shipping disruptions in the Strait of Hormuz as well as attacks on tankers and energy infrastructure.
• The situation remains highly fluid, however – without a final agreement, the risk of a renewed increase in the geopolitical premium has not disappeared.
• The market is therefore shifting from a “neither war nor peace” scenario towards pricing in greater chances of de-escalation, which is currently putting downward pressure on oil prices.

US Strategic Oil Reserves Fall to a 40-Year Low

Geopolitics is not the only factor that could keep volatility in the oil market elevated. The US Strategic Petroleum Reserve (SPR) has fallen below 300 million barrels for the first time since 1983, leaving the United States with a significantly smaller emergency buffer than in previous decades. This is particularly important at a time when the market remains exposed to potential supply disruptions in the Middle East.

• The SPR declined by another 6.1 million barrels last week.
• Total reserves fell to just under 299 million barrels, their lowest level in more than 40 years.
• The low level of the SPR leaves less room to deploy strategic reserves in the event of a sudden disruption to global oil supplies.
• Progress in the Hormuz negotiations is currently weighing on oil prices, but depleted US strategic reserves remain an important risk factor in the event of renewed escalation.

Higher Oil Prices Complicate the Fed Outlook Ahead of Key Inflation Data

The recent rise in oil prices has once again brought US inflation risks into focus. Markets have increased expectations for a Fed rate hike in September, while the 10-year US Treasury yield has risen to 4.727%. A lasting de-escalation in the Middle East and a decline in energy prices could, however, ease some of this pressure.

• Higher energy prices could make further disinflation more difficult and therefore limit the Fed's room to pursue a more accommodative monetary policy.
• The US 10-year Treasury yield rose to around 4.73% amid growing concerns that price pressures could remain elevated.
• A decline in oil prices driven by progress in negotiations could have the opposite effect, reducing the risk of renewed acceleration in inflation.
• Wednesday's US CPI release remains the key event and could determine whether markets maintain their increased expectations for a September Fed rate hike.

Oil Futures Chart (OIL)

Oil prices have pulled back towards the 50-day exponential moving average (EMA50) on the daily timeframe, currently running near $87.60. A move below this level could signal a shift towards bearish momentum and open the way for a potential pullback towards $82, where previous price reactions occurred. On the upside, the area around $90 remains a potentially important psychological resistance level.

Source: xStation5