The market's previous pricing of easing tensions between the US and Iran, alongside a gradual recovery in Hormuz shipping, has been shattered by Brent crude's return to $100 a barrel for the first time since July 24. This resurgence has reignited energy inflation expectations, introducing fresh uncertainty into the interest rate outlook ahead of the Federal Reserve's September meeting.
Brent crude broke through the $100 per barrel threshold during Wednesday's trading session, climbing over 2% intraday for the first time since July 24. Daily crude oil flow through the Strait of Hormuz has plunged from a typical 18 million barrels to just 4.9 million barrels, with the shipping obstruction worsening rather than easing. Fed Chair Warsh remains focused on price control, and CME FedWatch data now shows the market pricing in a 60.4% probability of a 25-basis-point rate hike in September, a stark contrast to earlier expectations of a cut.
US equity index futures saw subdued trading on Wednesday, with Dow E-minis down 84 points (0.16%), S&P 500 E-minis flat, and Nasdaq 100 E-minis edging up 0.04%. Mike Wilson, Chief US Equity Strategist at Morgan Stanley, cautioned that "rising oil prices and interest rates remain the primary risks for equities in the near term," noting that strategic reserves have been significantly drawn down to cushion oil prices.
Policy pressures are mounting on multiple fronts—the US Strategic Petroleum Reserve has fallen to 289.7 million barrels, its lowest level since 1982, while the Treasury is simultaneously advancing bond buybacks to curb long-end yield increases. These converging shocks are playing out just before the September 11 CPI data release and the September 15 Fed policy meeting.
Hormuz Disruption Worsens, Fragile Narrative of Easing Unravels
Brent crude has returned to $100 per barrel for the first time since July 24. As a critical chokepoint handling roughly one-fifth of global oil shipments, the Strait of Hormuz typically sees daily flows of about 18 million barrels, but this has dropped substantially to 4.9 million barrels since the conflict erupted. The US-Iran war has now entered its seventh month, and the previously priced-in expectations of de-escalation and shipping recovery have failed to materialize as tensions escalated again in late August and early September—shipping disruption has deteriorated, not improved.
The US Strategic Petroleum Reserve had fallen to 289.7 million barrels by the end of August 2026, the lowest level since 1982. Since the onset of the current US-Iran conflict, approximately 58 million barrels have been released, accounting for about 14% of the total. If an additional 39 million barrels are drawn down at the current pace, the SPR would decline further to roughly 243 million barrels, breaching the 2.5 billion-barrel safety threshold. Combined with the political pressure of midterm elections approaching and gasoline prices closely tied to voter sentiment, the government's buffer to suppress oil prices is nearly exhausted.
On the fiscal side, authorities are attempting to "extinguish the fire" at the long end of the curve. The US Treasury previously indicated it would purchase more long-dated bonds to curb yield increases, and Wednesday's buyback announcement drew attention, with JPMorgan analysts noting that some market participants are using this to gauge the scale of the Treasury's repurchase program.
September Rate Hike Probability Climbs to 60.4% as Inflation Expectations Reignite
Oil's break above $100 is transmitting to monetary policy through the chain of "rising oil prices → inflation pressure → interest rate repricing." Fed Chair Warsh has emphasized price stability, and traders are now betting on a rate increase this month—CME FedWatch data shows the probability of a 25-basis-point hike in September has risen to 60.4%. Some calculations suggest that if oil prices hold at $100 per barrel, US inflation could climb from 2.4% in January to above 4%, far exceeding the Fed's 2% target.
Market attention has shifted to the CPI data due after Friday's close on September 11 and the Fed's policy meeting on September 15. Strategists at Glenmede noted that this week's CPI report is the most significant data point before the September meeting, representing the last inflation reading policymakers will see before deciding on rates.
Comments