Brent Crude Holds Steady Amid Political Risks and Oil Supply Fears
The US Dollar has softened from its 18-month highs since Monday, as debt markets show signs of stabilization. Investors are reacting cautiously to Spain's snap elections amid a housing crisis. The yield gap between Spanish and German bonds narrowed below 140 basis points, while EUR/USD rebounded to 1.1240 after dipping to 1.1160 earlier in the day. Despite the initial shock easing, Europe's challenges are far from over.
The Dollar remains supported by the strong appeal of US assets, including higher Treasury yields and the Federal Reserve's aggressive monetary tightening. Even the slowdown in the services sector, as indicated by the ISM's drop from 55.4 to 54.9, did not raise major concerns, as readings above 50 still signal economic expansion, albeit at a slower pace.
The Euro faces pressure from fiscal issues in France, political turmoil in Spain, and the eurozone's reliance on imported energy. The 65% surge in oil prices this year has worsened its terms of trade. Meanwhile, WTI crude has fallen for the fourth straight week, down around 15% from its peak, double the decline seen in Brent. This drop is despite a recovery in Middle Eastern exports, price cuts by Saudi Arabia, and Iraq's search for new tankers.
According to Vortexa, crude oil flows in September reached 91% of pre-war levels at 16.3 million barrels per day. However, refined fuel exports from the Middle East remain at only 60% of pre-March levels. Kpler reports that petroleum product shipments through the Strait of Hormuz are now just 11% of total volume, down from 20% earlier this year, largely due to refinery closures in the region.
Brent's relative strength comes from fears of supply disruptions and pent-up demand in Eurasia. Initially, Europe and China delayed purchases as prices rose, but by October, they had no choice but to buy. High oil prices and political risks continue to weigh heavily on the Euro.