Brent: Geopolitics comes to the rescue

The US Dollar quickly regained ground amid the escalation of the conflict in the Middle East. The US responded to attacks on tankers in the Strait of Hormuz after Tehran stated that the vessels’ routes allegedly deviated from those it required. Massive air strikes on the Islamic Republic, the largest since the deal was struck, coupled with the suspension of the temporary licence to sell oil, sent Brent prices soaring by 6 per cent.  

Prior to the escalation of the geopolitical conflict, the oil market had been experiencing a ‘bearish’ trend. Daily traffic through the Strait of Hormuz stood at 30–60 tankers, which is below February’s levels. However, given the use of alternative routes, the decline in global demand and the reluctance of countries to quickly rebuild global stocks, this proved sufficient to push Brent back to late-February levels. The surge in oil supplies was set to collide with a market that had no need for it. 

The situation was exacerbated by the rapid recovery of oil production in Iraq, the sharp rise in Iranian exports and OPEC+’s intention to continue its strategy of gradually increasing production. Following the deal, the White House granted Tehran a 60-day grace period for previously banned oil sales, including those denominated in US dollars. And the Islamic Republic made full use of this. The new ban left some 63 million barrels already in transit without buyers. Supply issues led to a surge in Brent prices.

Nevertheless, the rally in Brent crude appears short-lived. Donald Trump recently expressed his commitment to diplomatic methods of resolving the conflict. Iran, which stands to lose a significant portion of its foreign exchange earnings, also has a stake in this. Moreover, the potential for a Brent rally appears limited. The market has adapted to the reduction in traffic through the Strait of Hormuz, found alternative routes, and global demand has fallen.  

For the US dollar, the escalation of the conflict in the Middle East is a ‘bullish’ factor. This is not just about increased demand for safe-haven assets. Alongside the rally in Brent, the chances of aggressive monetary tightening by the Fed are rising. The futures market has raised the probability of two rate rises in 2026 from 33 per cent to 42 per cent.