Oil prices have surged above $98 per barrel for the first time since early June, driven by escalating tensions in the Middle East. Iran-backed Houthi militants said they had attacked two Saudi Arabian tankers in the Red Sea, with the US military responding by using a B-1 long-range bomber to strike Islamic Revolutionary Guard Corps targets in Iran - the first such mission since fighting resumed 12 days ago. This latest escalation has intensified economist Peter Schiff's warning that Brent crude's surge above $100 could reverse June's 0.4% monthly CPI decline and produce a sharp inflation rebound in July. The price surge follows a Houthi attack on two Saudi tankers in the Red Sea and a declared blockade of Saudi-linked shipments through the Bab el-Mandeb Strait, with Iranian oil exports having fallen from as much as 2 million barrels per day to almost zero during the conflict. However, recent developments show Brent trading under $85 on Tuesday after reaching $100 last week, following a 15 percent correction as the immediate US-Iran war risk premium unwound after the US halted attacks over the weekend.
The US Federal Reserve's policy meeting this week has become increasingly difficult to predict, with a growing number of major brokerages warning that policymakers could opt for a hike in interest rates as rising oil prices and escalating geopolitical tensions threaten to reignite inflationary pressures. Traders now see roughly a 32% probability of a Federal Reserve rate hike, up from around 10% just two weeks ago, reflecting growing uncertainty surrounding the central bank's decision. While most Wall Street firms still expect the Federal Reserve to leave interest rates unchanged, the sharp jump in crude oil prices has significantly increased the possibility of a surprise rate increase. BofA expects the Federal Reserve to deliver three rate hikes beginning in September, while Deutsche Bank forecasts two increases over the same period. Several analysts believe the July meeting has become a genuine close call, given the combination of elevated oil prices, persistent inflation concerns and limited forward guidance from Federal Reserve Chair Kevin Warsh. However, Citigroup has maintained a more dovish stance, arguing that a credibility-driven rate hike would be difficult to defend because market-based measures of inflation expectations have remained subdued.
The latest rise in energy prices has led to fresh concerns about a more prolonged stagflationary shock, with investors pricing in more inflation as a result. The 1yr Euro inflation swap (+4.7bps) was up for an 8th consecutive day to 2.64%, while the 1yr US inflation swap (+1.2bps) also rose to 2.05%. This inflationary pressure has also seen investors price in a more hawkish path for central banks, with Fed futures now pricing in a 36% chance of a rate hike next week, having unwound most of the moves after the downside CPI surprise last week. Over in Europe, investors are now pricing in 48bps of further hikes by year-end, on top of the 25bps we had last month - the most hawkish path priced for the ECB in the last couple of months. The 1yr Euro inflation swap (+4.7bps) was up for an 8th consecutive day to 2.64%, while the 1yr US inflation swap (+1.2bps) also rose to 2.05%.
Fresh supply concerns have dramatically changed the oil market's direction, with Brent climbing about 7% to $100.71 on Thursday, its highest level in nearly two months, while US West Texas Intermediate moved above $90 for the first time since June. The price surge followed a Houthi attack on two Saudi tankers in the Red Sea and a declared blockade of Saudi-linked shipments through the Bab el-Mandeb Strait. According to Reuters, Iranian oil exports have fallen from as much as 2 million barrels per day to almost zero during the conflict, with Goldman Sachs analysts suggesting Brent could exceed $120 if disruptions persist. US forces struck Iranian military targets including maritime capabilities, missile and drone storage facilities, coastal surveillance sites, and air defense assets, as reported by Centcom, while buyers of LNG from Qatar and the UAE are seeking lower prices and stronger supply guarantees as risks to shipments through the Strait of Hormuz increase. However, recent developments show visible transits through the Strait of Hormuz have fallen sharply as Iran continues targeting tankers attempting to move through it, with the International Maritime Organization warning it is too dangerous to cross the Strait of Hormuz at the moment.
Global oil markets are moving through a fragile phase where geopolitical risk, maritime disruption, depleted inventory buffers, and stress across refining systems are converging. OECD countries have been drawing down strategic petroleum reserves, using roughly 700 million barrels of reserve inventories from March to June, leaving very little margin for a prolonged war. Shipping data reinforce market caution: crude oil stored on tankers stationary for at least 7 days rose +3.5% week-over-week to 102.84 million barrels in the week ended July 24. The assumption that Gulf producers can rapidly reroute exports away from Hormuz is only partly valid, with Saudi Arabia's East-West pipeline and UAE export routes together capable of redirecting roughly 8-9 million barrels a day, but even under broader adaptation scenarios, roughly 7-9 million barrels a day of Gulf crude and product exports could still depend on the strait. India ranks fourth globally with crude processing of roughly 5 million bpd, making it highly exposed to price spikes and shifts in Russian crude flows. Brent crude could retreat to an average of $80 a barrel by 4Q if elevated prices ultimately force de-escalation, but renewed hostilities continue to support a $90-$110 frozen-conflict scenario in the near term.
