- The Federal Reserve hiked interest rates by 25 basis points as expected.
- Saudi Arabia will likely use the US route through Oman’s coast to transport its oil.
- The downside potential for interest futures remains.
Interest futures rose on Thursday as focus shifted from the FOMC meeting to falling oil prices. The Fed hiked interest rates as expected and signaled at least one more hike this year. The expectations of this move had boosted Treasury yields, hurting interest futures. Meanwhile, oil supply concerns eased with Saudi Arabia pursuing alternative routes, leading to a decline in oil prices.
US 10-Year yield (Source: Bloomberg, Federal Reserve)
The Federal Reserve held its meeting on Wednesday and hiked interest rates by 25 basis points as expected. As a result, the dollar and Treasury yields rose. Meanwhile, interest futures were relatively subdued. Moreover, policymakers supported another rate hike before the year ends. The Fed is determined to bring inflation down to its target of 2%.
Recent developments in the Middle East have put more pressure on the central bank to tighten monetary policy. The Iran war has escalated to include Saudi Arabia, a major oil producer, worsening the outlook for oil supply. Iran’s allies have focused their attacks on the country’s energy facilities.
Last week, they attacked a major pipeline, causing significant damage. The pipeline had allowed Saudi Arabia to continue exporting oil through the Strait of Hormuz. The attack forced its closure and sent oil prices higher.
Fortunately, reports revealed that the pipeline would be operational in a few days’ time. However, this remains to be seen since the damage could take longer to repair. In the meantime, Saudi Arabia will likely use the US route through Oman’s coast to transport its oil. The news sent oil prices lower as supply concerns eased.
“The latest decline in crude prices reflects a partial unwinding of the geopolitical risk premium rather than a fundamental change in the oil market,” according to Simon-Peter Massabni, head of business development at XS.com.
“Improved logistics for Saudi crude exports have reduced the market’s assessment of how much supply is at risk,” Massabni said.
At the same time, inflation worries eased, sending Treasury yields lower while interest futures recovered. Nevertheless, experts believe this is only a temporary move as fundamentals still support higher oil prices. As long as the tensions remain and there is no peace deal, the risk premium on oil will remain. Therefore, the downside potential for interest futures also remains.
