- Tensions between Yemen’s Houthi militants and Saudi Arabia have intensified.
- Iran said that it is preparing to start attacking US warships.
- US headline inflation accelerated by 3.7% from 3.4% in the previous month.
Oil paused its one week rally on Thursday as prices pulled back amid an increase in Fed rate hike expectations. However, increasing tensions in the Middle East has renewed worries about supply, especially through the Strait of Hormuz.
Since Thursday last week, oil has gained as tensions between Yemen’s Houthi militants and Saudi Arabia intensified. The group has attacked several oil facilities, tankers and airports in Saudi Arabia, raising concerns about fuel supply.
Brent futures (Source: Bloomberg)
Furthermore, reports on Wednesday indicated that a ship was sunk in the Strait of Hormuz. Oil flows through the waterway have increased gradually despite ongoing tensions. However, attacks on tankers could derail this progress. At the same time, the exports through the Strait had increased amid a pause in strikes between the US and Iran.
However, Trump has said he will resume attacks on Tehran after the November midterm elections. At the same time, Iran said this week that it is preparing to start attacking US warships. There is no doubt that the war in the Middle East will be prolonged. This means the risk premium on oil will remain and prices could rally any time.
Nevertheless, future rallies will likely be short given the global economy is slowly adapting to the war. The US has created alternative routes for transporting oil and G7 countries are ready to release diesel stocks to ease supply constraints.
“Saudi crude continues to reach international buyers through alternative routes, while accelerated emergency stock releases by IEA members provide an additional buffer, preventing a sharp rise in prices, even as tensions remain elevated,” said Firas Bechwaty, head of business development at online trading platform ICM
Elsewhere, market participants focused on US inflation data which came in hotter than expected. According to the CPI report, headline inflation accelerated by 3.7% from 3.4% in the previous month. Economists had expected the figure at 3.6%. Meanwhile, the monthly acceleration met forecasts.
The data increased the likelihood of a hike at the October meeting to 54%. Higher borrowing costs curb economic growth, hurting demand for oil. As a result, oil paused its rally on Thursday. Traders are now waiting for wholesale inflation and sales data.
