Can WTI Sustain Gains Above $98.50 Amid Middle East Supply Risks?

WTI’s gain this month has exceeded 10% as hostilities intensify across the Middle East and Eastern Europe.
Market momentum faced resistance as signals on US-Iran negotiations remained mixed and reports of an imminent agreement were dismissed.
Middle Eastern oil flows have returned to 80% of prewar levels despite 18 attacks on vessels in the Strait of Hormuz.

Crude oil regained ground as traders weighed conflicting reports on diplomatic progress between the United States and Iran. Following two days of declines, West Texas Intermediate (WTI) was trading near $98.60 during Wednesday’s Asian session.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Market momentum encountered resistance after high-level diplomatic meetings, even as negotiations continued. During a visit to Tehran, Pakistan’s army chief, Field Marshal Asim Munir, held discussions with senior Iranian diplomatic and military officials on bilateral relations and the state of talks with Washington. A diplomat participating in the discussions clarified that efforts to bring the conflict to an end remained ongoing, but rejected reports suggesting a final agreement was imminent.

Mounting risks to global supply have lifted oil prices by more than 10% this month despite uncertainty on the diplomatic front. Geopolitical tensions have escalated as hostilities involving Saudi Arabia, Iran-backed Houthi forces, Russia, and Ukraine intensify. At least 18 attacks on vessels in the Strait of Hormuz over the past two weeks have added to those tensions. Energy infrastructure has nevertheless remained resilient, with Middle Eastern oil flows largely returning to approximately 80% of prewar levels.

What is driving Brent to a new multi-month high?

Brent has “backed up to $111.2/b, highest since 20th May,” according to strategists at Societe Generale. They point to renewed strength in crude, highlighting the oil market’s latest advance to multi-month highs.

US Dollar: Key Questions Answered

What role does the US Dollar play?

As the official currency of the United States of America, the US Dollar (USD) also serves as the ‘de facto’ currency in a significant number of other countries, circulating alongside their local banknotes. Data from 2022 show that it accounts for over 88% of worldwide foreign exchange turnover, equivalent to an average of $6.6 trillion in daily transactions, making it the world’s most actively traded currency. The USD replaced the British Pound as the world’s reserve currency after the Second World War. Gold backed the US Dollar for most of its history, until the Gold Standard ended with the Bretton Woods Agreement in 1971.

How does Federal Reserve policy affect the US Dollar?

Monetary policy, set by the Federal Reserve (Fed), is the single biggest influence on the US Dollar’s value. Achieving price stability (controlling inflation) and promoting full employment are the Fed’s two mandates. Adjustments to interest rates are its main means of pursuing these goals. If prices climb too rapidly and inflation exceeds the Fed’s 2% target, the central bank will increase rates, supporting the USD. Conversely, inflation below 2% or an excessively high Unemployment Rate may prompt the Fed to cut interest rates, putting pressure on the Greenback.

How does Quantitative Easing work, and what does it mean for the US Dollar?

The Federal Reserve can resort to printing additional Dollars and introducing quantitative easing (QE) in extreme circumstances. Through QE, the Fed sharply expands the supply of credit within a financial system that is no longer functioning smoothly. This unconventional policy is deployed when credit dries up because banks refuse to lend to one another for fear of counterparty default. It is a last-resort measure when interest rate cuts alone are unlikely to deliver the required outcome. During the Great Financial Crisis in 2008, QE was the Fed’s preferred response to the credit crunch. The process entails printing additional Dollars to purchase US government bonds, mainly from financial institutions. The US Dollar typically weakens as a result of QE.

How does Quantitative Tightening work, and what does it mean for the US Dollar?

In quantitative tightening (QT), the reverse process, the Federal Reserve ceases bond purchases from financial institutions. It also refrains from reinvesting the principal repaid when bonds in its holdings mature into further purchases. This generally supports the US Dollar.