Oil Falls to $80 as Iran-Oman Strait Deal Eases Supply Risk

Investors returning from summer holidays found that the collapse of the Middle East ceasefire had not derailed global growth. The latest PMIs showed resilient expansion particularly in the US and Asia outside China, while Europe remained the relative laggard, according to a weekly strategy note from a major European bank's research desk.

Oil prices rose during periods of escalating warfare, briefly topping $100 a barrel after the Houthi movement announced a second front in the Bab el-Mandeb strait. But crude fell back this week after news that Iran and Oman had agreed in principle to reopen the Strait of Hormuz. The note said any positive news from the Middle East should be read with caution. A deal agreed “in principle” likely remains subject to backroom bargaining.

Iran and Oman have agreed to reopen the strait for a two-to-four-month period, with Iran maintaining significant control. The US has not given its green light to the deal. Even in the best case, traffic is unlikely to restart immediately, the note added.

Despite the uncertainty around key maritime chokepoints, Brent crude reversed to $80 a barrel. EUR/USD rebounded above 1.15. Traffic via the Strait of Hormuz has fallen close to zero since mid-July. In the Bab el-Mandeb strait, volumes have fallen but not collapsed despite recent Houthi attacks on Saudi oil infrastructure. Over the past months, China’s oil imports have dropped sharply, highlighting how demand destruction is rebalancing the crude market, the analysts said.

While the global crude market is relatively calm, broader energy markets have been under pressure during the summer. Refineries globally are struggling to access the specific crude qualities their processes are optimised for, keeping refining margins elevated. For natural gas, low inventory levels especially in central Europe imply prices will stay elevated through the coming winter, the note said.

Other commodity markets have followed Middle East developments. Aluminium prices reacted to both negative and positive news, as the Persian Gulf is a key producer region. Copper prices trended upward, driven by the AI investment boom. Wheat prices hit a multi-year high in July, as clashes between Russia and Ukraine in the Black Sea added to the list of geopolitical concerns.

Despite all the volatility across commodity markets, inflationary pressures eased during the summer, including for core inflation. The near-term inflation outlook continues to be driven by geopolitics, but AI-driven cost pressures are also becoming a concern. The bank has not changed its major central bank calls during the summer. It still expects the ECB to hike in September, and the Fed to hike twice in December and March.

Next week, the US July CPI and PPI data are due. On Friday, retail sales will provide the first hard data on the strength of the American consumer, and the University of Michigan survey will offer a more forward-looking signal.