Oil prices are retreating to levels near those before the Iran conflict, but one economist argues this does not necessarily signal a decline in US inflation.
On Wednesday local time, US crude oil prices fell approximately 4%, briefly dropping below $70 per barrel for the first time since early March. Brent crude prices declined 5%, to around $72 per barrel.
This price drop occurred following the signing of a memorandum of understanding between the US and Iran aimed at ending nearly four months of conflict. Crude oil shipments through the Strait of Hormuz saw a recovery on Wednesday.
While the conflict had pushed oil prices higher, reigniting inflation concerns in recent months, Torsten Slok, Chief Economist at Apollo Global Management, stated that falling oil prices do not automatically equate to slowing inflation.
"The market narrative is shifting from 'lower oil prices mean lower inflation' to 'lower oil prices mean more demand in an already hot economy and therefore higher inflation,'" Slok wrote on Wednesday.
He pointed out that a series of factors indicate inflation continues to climb, even as oil prices have receded from their wartime highs.
This chief economist elaborated: "Given the strong April CPI report, the hot May nonfarm payrolls data, and the Fed's hawkish stance, the consensus view is that the reopening of the Strait of Hormuz will further raise the temperature of the economy, forcing the Fed to raise rates soon."
Oil prices accelerated their decline from recent highs after the US and Iran signed a preliminary agreement on June 17. Market experts anticipate the downward trend in oil prices will persist.
Soojin Kim, a research analyst at MUFG, commented: "Oil prices are likely to remain under downward pressure as supply recovers and the risk premium continues to unwind."
The analyst added: "Although key issues including Iran's nuclear program, a ceasefire in Lebanon, and the full reopening of the Strait of Hormuz remain unresolved, the market is increasingly expecting regional energy flows to normalize."
This week, analysts at Goldman Sachs suggested that the global adoption of electric vehicles over the coming year will offset the impact of disruptions to energy flows.
The bank also stated that the effects of the oil crisis will fade, with Brent crude prices expected to fall back to around $50 per barrel by the end of 2027, representing a decline of approximately 23%.
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