Uncertainty naturally prevailed last week, simply because there are two conflicts taking place simultaneously close to, or in, oil-producing and refining regions, with ambiguous outcomes and with all the unintended, or, in fact, intended, consequences for the global economy. One need not be an expert in the field to conclude that, without these hostilities, oil prices would be lower.
Yesterday’s drop in oil prices was likely driven by growing concerns about demand destruction, as discussed below. Still, in the current environment, it is hard to see the market retreating considerably. Hostilities continue on both fronts in the Middle East, around the Persian Gulf as well as the Red Sea. Since the US has proven powerless to achieve whatever objectives it has regarding Iran, it has been forced to resort to a belligerent narrative, which will do nothing to ensure the uninterrupted flow of oil through the Strait.
The markets lined themselves up yesterday in anticipation of the July US CPI reading which eventually delivered something of damp squib. Those that predicted only a meagre rise in the prices paid in the US were proven right and it was indeed the lower gasoline prices consumers enjoyed when the memorandum of understanding still held some viability that kept inflation in check. The strains of doves have increased in volume with the probability of a rate hike falling considerably on the CME FedWatch tool.
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