Oil prices continued their dramatic decline, falling to their lowest levels since the war with Iran began on February 28, with U.S. benchmark crude oil falling below $70 a barrel on Wednesday. As per Investing.com India, the sharp slide will ease pressure on headline inflation measures in the coming months, though the question remains whether the bond market will soon follow suit and price in lower inflation risk. Weighing on oil prices is a preliminary deal to end the war with Iran, and shipping through the Strait of Hormuz is gradually recovering, although energy volumes remain far below pre-war levels. According to Kpler freight analyst Matthew Wright, what shippers are looking for is consistency over days and weeks rather than just single-session improvements.
Market sentiment was shaped by evidence that shipping activity through the Strait of Hormuz is steadily recovering following months-long conflict that had disrupted one of the world's most important energy chokepoints. Reports showed that several previously stranded supertankers have successfully exited the Gulf carrying crude cargoes, while a growing number of Qatar-linked liquefied natural gas vessels have resumed voyages through the waterway. According to global trade intelligence firm Kpler, traffic through the Strait of Hormuz has picked up since the U.S. and Iran last week signed a memorandum of understanding to reopen the crucial waterway. However, Kpler noted that "The Strait appears operational under the US-Iran MoU, but dark-route activity and uncertainty beyond the 60-day window keep the recovery cautious." The war premium that took months to build came off in a single session as tankers started clearing the Strait and Iran's barrels are already loaded and cleared to sell under the 60-day waiver.
Morgan Stanley has cut oil forecasts for the second time in about two weeks as flows through the Strait of Hormuz return faster than expected, while strong U.S. supply and weak Chinese demand raise the risk of a global oil glut. According to analysts including Martijn Rats, dated Brent is expected to average $75 a barrel in the third and fourth quarters, down by $15 and $5 respectively, with outlooks for all four quarters of next year also reduced, seeing dated Brent at $70 at the end of 2027. As per Morgan Stanley, "The Strait is reopening faster than expected, yet the 'twin solvers' of high US exports and low Chinese imports remain in place." The bank noted that to balance the oil market in 2027, flows through Hormuz need to recover to only about 65% of the pre-conflict level, or about 11-to-12 million barrels a day. Brent futures, which rose to a peak above $126 in April, have erased their war-time gains as Iran and the U.S. continue talks aimed at permanently ending the war, with the most-active September contract trading at $73.47 on Tuesday.
Despite the oil price decline providing some relief, Fed funds futures are pricing in fewer rate hikes than previously expected: a 34% probability of a ¼-point hike at the next FOMC meeting on July 29, with 60% odds of the first increase coming by September. As per The Economic Times, nine of the 18 policymakers who submitted projections in the 'dot plot' at the June meeting indicated they expect at least one rate increase in 2026, but a majority of economists polled by Reuters say the U.S. central bank will hold its benchmark interest rate steady for the rest of this year. The 2-year note yield, which typically moves in step with Fed interest rate expectations, dropped 3.5 basis points to 4.086%, the lowest since June 17, while the yield on benchmark U.S. 10-year notes fell 2.15 basis points to 4.371%. Apollo Chief Economist Torsten Slok warns that lower oil prices could turn out to be inflationary, explaining that 'the narrative in markets is changing from 'lower oil prices mean lower inflation' to 'lower oil prices mean more demand in an already overheating economy, which means higher inflation.'
