Middle East Tensions Spark Oil Price Fears Amid Escalating Conflict

Tensions in the Middle East have escalated once again, with daily exchanges of strikes between Iran and US assets in the region. The Strait of Hormuz (SoH) has been closed for shipping, causing oil prices to be under threat. Recently, two Saudi ships in the Red Sea were struck by Houthis, putting the alternative route under risk.

The US Strategic Petroleum Reserve (SPR) levels have fallen to lows not seen since its creation in the mid-1980s. Drawdowns from national reserves have helped keep oil prices capped but may be nearing their limit. Refined product stocks are tight due to damaged refining capacity in Russia and the Gulf, causing a significant deviation near highs.

Markets have come off their highs, with equity markets not experiencing a deep sell-off. Fixed income markets have been under more pressure as inflation worries return. Central banks market pricing has increased for hikes from major central banks due to fears of passthrough effects from higher oil prices to inflation.