Analysts say geopolitical uncertainty and low global inventories are likely to keep a floor under oil prices and inflation through 2026.
Image: US NAVY / AFP
Oil prices are expected to remain under pressure despite hopes of a lasting ceasefire between the United States and Iran, with analysts warning that rebuilding global energy supply chains will take considerably longer than financial markets anticipate.
Brent crude eased to around $84 a barrel on Thursday morning after surging earlier this month following renewed conflict in the Strait of Hormuz, but market analysts believe geopolitical risks, low inventories and constrained fuel supplies will continue supporting higher prices.
Bianca Botes, managing director at Citadel Global, said softer United States inflation data had provided some support for global markets, although uncertainty surrounding the Middle East continued to influence investor sentiment.
"Wall Street saw a positive session yesterday as the United States' softer inflation reading continued to bolster markets. The S&P 500 closed 0.38% higher, while the Dow closed up 0.29%. However, the tech heavy Nasdaq declined as chip stocks remained under pressure," Botes said on Thursday.
She added that Asian markets had also weakened, with South Korea's KOSPI falling more than 6% and Japan's Nikkei declining 2.7%.
Botes said Brent crude had eased to around $84 a barrel while gold traded lower at $4 035 an ounce as uncertainty surrounding the Middle East conflict continued to cloud the inflation outlook.
"The rand was steady at R16.33 to the dollar, R18.73 to the euro and R22.10 to the pound," she said.
Brian Arcese, portfolio manager at Foord Asset Management, said oil markets had reacted too quickly to diplomatic developments while overlooking the slower recovery taking place in the physical energy market.
"For some weeks, the oil market hastily chose to believe in the US Iran ceasefire deal. After the adversaries announced a 60 day pause and a path to reopening the Strait of Hormuz, Brent crude quickly fell towards $70 a barrel from more than $110 in May. Renewed fighting in July has sent prices sharply higher and prices are moving faster than facts."
Arcese said restoring normal oil flows involves far more than political agreements.
"Traders are quick to price in relief, but the physical market is always slower to adjust. Even during a ceasefire, tankers must be persuaded to pass through the recently mined strait. Insurers must cut war risk premiums. Ships that diverted to safer and more profitable Atlantic routes must return. Gulf producers must restart output, while refineries damaged by Iranian strikes must raise throughput. None of this happens overnight."
He said global markets had avoided an even sharper oil price spike because of three temporary buffers.
"China cut crude imports, partly by drawing on reserves and partly by cutting demand. America exported more crude and refined products, helped by releases from its Strategic Petroleum Reserve. Finally, other producers, including Brazil, Canada, Norway and Venezuela, added barrels at the margin."
However, Arcese warned that those buffers were becoming less reliable.
"China may soon want to rebuild stocks rather than drain them. America's Strategic Petroleum Reserve is already at a four decade low. The pace of releases is expected to slow dramatically, or stop completely."
He added that these factors would likely prevent crude prices from falling significantly even if Gulf production returned to normal.
"A sustainable move much below the mid $70s per barrel would require more than diplomatic optimism. It would require ships, refineries, reserves and end users all to behave as if the shock was truly over. They are unlikely to do so quickly."
Arcese also cautioned that consumers should not expect lower crude prices to immediately translate into meaningful relief at the fuel pump.
"Crude oil is only the first price in the chain. Petrol, diesel, jet fuel, LPG and naphtha matter more to households and companies, and these refined products remain exposed to refinery bottlenecks, shipping delays and regional shortages."
He said the biggest concern for central banks was that oil prices could settle at levels high enough to keep inflation above target.
"The immediate disinflation from cheaper crude prices may therefore prove real but shallow. The larger risk is that the oil price remains too high for central banks to declare inflationary victory."
Neil Wilson, investor strategist at Saxo UK, said markets remained focused on the risk that a prolonged low intensity conflict in the Middle East could keep energy prices elevated.
"Oil prices were down a bit on Thursday morning although there is still plenty of risk around the Middle East. The risk is more about a low level forever war meaning higher for longer energy prices, stickier inflation and stagflation which leaves central banks in a bit of a bind."
He questioned whether policymakers could remain comfortable with inflation still well above target.
"As Warsh pointed out this week, inflation has been above target for 63 months. I fail to see how they can say that policy is appropriate at this level."
Analysts said while easing inflation has improved investor sentiment, developments in the Middle East remain the biggest driver of energy markets and will continue to shape expectations for inflation, interest rates and global economic growth in the months ahead.
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