Middle East tensions are escalating again, with Iran and the US engaging in near-daily attacks on each other in the region. This has once again disrupted shipping through the Strait of Hormuz, and the current situation is more likely to affect alternative transport routes critical to regional crude exports.
Invesco believes a significant de-escalation of regional tensions is unlikely in the near term. The potential for improvements in shipping conditions and a decline in crude oil and refined product prices remains low. Over the coming months, oil prices are expected to hover around or above $100 per barrel, fluctuating based on developments.
Releases from strategic petroleum reserves have helped curb the rise in oil prices over the past few months. However, Invesco sees diminishing room for further releases. US strategic petroleum reserves have fallen to their lowest levels since their establishment in the mid-1980s. Inventories of refined products are drawing increasing concern.
Damage to some refining capacity in Russia and the Gulf region, combined with capacity constraints in parts of the Middle East, is widening crack spreads. This is pushing refined product prices higher, with the divergence from crude oil prices nearing historical highs.
Due to fears that rising oil prices will further fuel inflation, investors have recently increased their expectations for rate hikes by major central banks. Invesco maintains its view that the Federal Reserve and the Bank of England are unlikely to raise rates again this year, as current inflationary pressures stem primarily from supply-side shocks. However, the European Central Bank still has room for another rate increase, given its higher sensitivity to inflation risks and policy rates that remain below those in the US and UK.
Regarding oil prices and broader financial markets, Invesco believes the key issue to watch is whether the current Middle East situation escalates further and its scope. If energy production infrastructure in the region is attacked, oil prices are likely to rise further. If oil tankers in the Red Sea are targeted, reducing Saudi crude exports through that route, Invesco expects similar upward pressure on oil prices. The firm is closely monitoring crude price movements, as the final product cost is the factor directly impacting inflation and consumer cost pressures.
Invesco notes that talks between the US and Iran are expected to resume around mid-August. Until then, the impact of commodity price volatility on inflation and central bank policy direction will once again become a market focus, potentially weighing on market performance in the near term.
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