Instead, the current oil price is historically consistent with gasoline prices of just above $4/gallon, which is where we currently stand.
A de-escalation of the conflict and a resumption of flows would likely mean oil prices drop sharply and rate hike expectations start to unwind.
US President Donald Trump could quickly pivot to a position that eases some of the financial pain for the electorate.
A further tightening of global supply conditions would mean oil prices could rise towards $120/bbl.
That would lead to sharply higher headline inflation.
Instead, the current oil price is historically consistent with gasoline prices of just above $4/gallon, which is where we currently stand. With natural gas prices remaining little changed in the US given ample domestic supply, the energy situation doesn’t guarantee that we’ll see inflation push higher again.
A de-escalation of the conflict and a resumption of flows would likely mean oil prices drop sharply and rate hike expectations start to unwind. After all, the mid-term US elections are less than four months away. US President Donald Trump could quickly pivot to a position that eases some of the financial pain for the electorate. The alternative is that we see a deterioration in conditions should Houthi rebels choke off Red Sea supply to Asia from Saudi Arabia. A further tightening of global supply conditions would mean oil prices could rise towards $120/bbl. That would lead to sharply higher headline inflation. The Fed would likely respond with higher interest rates.
For now, we’re leaning in the direction of a de-escalation, but it needs to come quickly. We believe underlying price pressures are easing thanks to cooling housing costs, weaker wage growth and tariff refunds improving corporate cash flow. But we’ll need to see a return to dialogue in the Middle East and a de-escalation that prompts a reversal in energy prices in order to shift market pricing.
