Brent Breaks Over $120, Going Higher?

Crude prices have risen to the highest level since the war in the Middle East began, with Brent at the highest level since 2022 when Russia invaded Ukraine. The price gains have completely erased the drop seen after the start of the ceasefire and potential negotiations to end the war. Interestingly, however, other financial markets have not returned to their pre-ceasefire levels. All of this has important implications for Forex.

One of the issues is confusing messaging about whether there will be a re-escalation in the war. On Tuesday, the Wall Street Journal reported that the White House had decided to prepare for an extended blockade of Iranian ports to pressure for a resolution, instead of ending the ceasefire. That sent crude prices higher, as it was understood to imply the Strait would be closed for an extended period. Then, on Wednesday, Axios reported that US President Donald Trump would be briefed on options for an intense bombardment campaign in Iran to break the logjam in negotiations. That was seen as the catalyst that pushed crude prices to their highest level in years.

The Latest Developments in Crude

The move in oil prices shows that unexpected events in the Middle East can still push the price substantially. At the same time, several other developments would otherwise have weighed on crude prices. Which means Brent is rising despite market fundamentals, as concern over the conflict resurfaces.

US crude inventories crashed last week, down by 6.2 million barrels, continuing the trend of several weeks. Despite the large drawdowns, US inventories remain around 1% above the average for this time of year. That means that there is still room in the market despite the shut-ins. However, if the situation persists for a couple more months, then the US market could face issues.

Uncertainty Prevents Increased Production

Despite high crude prices, American producers have been reluctant to increase production to fill the gap. That’s because the Strait could be opened at any moment, depending on a political agreement, which could tank crude prices. Therefore, producers are reluctant to make significant investments.

The geopolitical situation is also changing, after the UAE announced it would leave OPEC at the end of the month. The Arab nation is the fourth largest in OPEC, but it has also been among the most affected by the war. Leaving the cartel would mean it is no longer subject to production quotas, and it intends to increase production once the Strait is opened to meet pent-up demand.

Crude Prices Affecting the Forex Market

Beyond the recent gains in crude, the potential disruption to global economies is also shaking up currency markets. Inflationary pressures were already the topic of discussion for central banks this week, with the Euro among the most vulnerable currencies to an energy supply shock.

If crude oil remains elevated, the odds of a rate hike by the ECB and the BOE in June could rise, putting pressure on those currencies. Weakness in the yen due to higher import costs could finally trigger intervention to push the USDJPY back below the 160 level.

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