Above $98.50: WTI maintains gains amid Middle East supply risks

Over 10% has been added to WTI this month as hostilities intensify in the Middle East and Eastern Europe.
Conflicting indications from US-Iran negotiations weighed on the market, alongside the dismissal of reports that an agreement was close.
Middle East oil flows returned to 80% of prewar levels despite 18 attacks on vessels in the Strait of Hormuz.

$98.60 is the approximate price of West Texas Intermediate (WTI) oil in Wednesday’s Asian session. The benchmark is recovering after two days of declines. Crude advanced as traders weighed conflicting accounts of diplomatic progress between the United States and Iran.

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

High-level diplomatic meetings failed to remove obstacles to market momentum, although negotiations are continuing. In 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 negotiations with Washington. A diplomat participating in the discussions said work to end the conflict was continuing, but rejected reports suggesting a final agreement was imminent.

Mounting global supply risks have driven oil prices more than 10% higher this month, notwithstanding the diplomatic uncertainty. Geopolitical strains have deepened 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 nonetheless proved resilient: Middle Eastern oil flows have largely returned to approximately 80% of prewar levels.

$111.2/b: Brent reaches 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 crude strength as oil markets extend their advance to multi-month highs.

US Dollar: Key Facts

The US Dollar’s global role

As the official currency of the United States of America, the US Dollar (USD) also circulates alongside local banknotes as the ‘de facto’ currency in a significant number of other countries. No currency is traded more widely. According to 2022 data, it represents over 88% of global foreign exchange turnover, equivalent to an average of $6.6 trillion in daily transactions. After the Second World War, the USD displaced the British Pound as the world’s reserve currency. Gold provided backing for the US Dollar through most of its history, until the Bretton Woods Agreement in 1971 brought the Gold Standard to an end.

Federal Reserve policy and the US Dollar

Monetary policy is the single biggest influence on the US Dollar’s value, and the Federal Reserve (Fed) determines that policy. Adjusting interest rates is its main means of fulfilling its two mandates: maintaining price stability (controlling inflation) and promoting full employment. The Fed will increase rates when prices rise too rapidly and inflation exceeds its 2% target, 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.

Quantitative Easing: Implications for the US Dollar

Printing additional Dollars and introducing quantitative easing (QE) are further options available to the Federal Reserve in extreme circumstances. Through QE, the Fed sharply expands the supply of credit within a stalled financial system. This unconventional policy is deployed when credit dries up because banks refuse to lend to one another, fearing that counterparties may default. It serves as a last resort when interest-rate cuts alone are unlikely to deliver the required outcome. During the Great Financial Crisis in 2008, the Fed chose QE to tackle the credit crunch. The process entails printing more Dollars to purchase US government bonds, primarily from financial institutions. A weaker US Dollar is the usual result of QE.

Quantitative Tightening: Implications for the US Dollar

Under quantitative tightening (QT), the reverse of QE, the Federal Reserve ceases bond purchases from financial institutions. It also refrains from reinvesting the principal repaid when its existing bond holdings mature into new purchases. The process generally supports the US Dollar.