Brent is back just over $100 per barrel, threatening to reach highs not seen since early June. Traders remain concerned about the stability of Middle East oil flows. However, the market faces contradictory data and appears to favour the short-term outlook over the long term. Meanwhile, economists warn that crude oil inflation could still affect global economies and currencies like the dollar, euro and yen. This could happen even if oil prices don’t rise further.
Two reports came out on Tuesday and appeared to point in opposite directions. US API crude inventories showed a staggering withdrawal of 11.2 million barrels. However, the Wall Street Journal reported last week that oil flows from the Middle East had exceeded pre-war levels. The report tracked supply passing through the Strait of Hormuz as well as other routes. Reuters disputed the findings, suggesting that flows were lower based on a different calculation.
The Market Moving on Timing
One explanation for the market move could be that the data reflect different supply periods. The inventory figures highlight near-term supply issues. Meanwhile, oil leaving the Middle East could take at least a month to reach its destination. Market behaviour suggests traders are focusing on near-term negative supply shocks. However, these disruptions might not reflect the commodity’s long-term trend.
A closer look at the inventory data shows that the Strategic Petroleum Reserve (SPR) is helping cover US supply shortfalls. Commercial inventories have fallen by only 5 million barrels, leaving them just 3% below the pre-war average. The SPR, on the other hand, has dropped to just 287 million barrels from 409 million at the start of the war. The Biden administration had already reduced reserves to multi-decade lows. It released oil reserves to contain prices following Russia’s invasion of Ukraine.
Analysts Say Higher Prices Are Coming
The drawdown in the SPR is around 42% since the start of the war. Crucially, reserves remain only around 40 million barrels above the operational minimum. Analysts estimate that releasing oil becomes more operationally difficult and costly if reserves fall below 250 million barrels. This could push WTI prices higher if commercial inventories continue to decline.
Shipping costs are another source of price pressure. Analysts note that costs have soared as disruptions in the Strait of Hormuz increase the number of ships needed. Higher fuel prices are also driving up transportation expenses.
Reports suggest that delivered oil prices in China are reaching $140 per barrel, with shipping accounting for as much as 40% of that cost. Goldman Sachs warned that oil transport costs to the US have risen to $20 per barrel from $3 before the war.
Even if crude prices don’t rise, higher delivery costs could still affect the market. Transporting fuel to refineries could become more expensive, pushing up prices at the pump and adding to inflation.
ECB Backing Off While Fed Steams On
These rising costs could significantly affect currency markets. The ECB is taking a more dovish tone, while uncertainty remains around the Fed’s outlook. Central banks cannot control crude oil prices or consumer energy costs. Raising interest rates does not increase oil supply or directly reduce prices at the pump. Instead, higher rates slow economic activity in other areas to help contain inflation.
For slow-growth economies like the UK and the eurozone, raising rates could actually weaken the currency rather than support it. The ECB is already taking a more dovish tone. By contrast, the US continues to show solid economic growth, giving the Fed more room to keep hiking.
It’s not just oil prices that matter. The cost of transporting oil to consumers could also weigh on EURUSD going forward.
