Brent is easing off at a slower pace

The US Dollar has retreated from 18-month highs since Monday afternoon on signs that debt markets are stabilising. Investors reacted cautiously to news of snap elections in Spain against the backdrop of the housing crisis. The yield spread between local and German bonds fell below 140 basis points, whilst EUR/USD rebounded to 1.1240 after slipping to 1.1160 at the start of trading on Monday. The initial shock has passed, but this does not mean the end of the European drama.

The US dollar is finding support thanks to the strong appeal of US assets, including higher Treasury yields and the Fed’s more active monetary policy tightening. Even the slowdown in business activity in the services sector, as measured by the ISM, from 55.4 to 54.9, did not particularly alarm investors, as readings above 50 indicate that the economy remains in expansion, albeit at a slower pace.

Pressure on the euro stems not only from the fiscal crisis in France and the political crisis in Spain. The eurozone is a net importer of energy commodities, so the 65% rally in oil prices since the start of the year has worsened its terms of trade. Meanwhile, WTI crude has been falling for the fourth week running, having lost around 15% from its peak – twice the decline seen in Brent. All this is despite a recovery in exports to the Middle East, price cuts by Saudi Arabia, and Iraq’s search for new tankers, which are fuelling bearish sentiment on the EUR/USD.

According to Vortexa, crude oil and condensate flows in September recovered to 91% of pre-war levels at 16.3M bpd. However, refined fuel exports from the Middle East stand at only 60% of pre-March levels. Kpler estimates that the share of petroleum product shipments via the Strait of Hormuz is 11% of total volume, significantly lower than the 20% recorded at the start of the year. The main reason for this is the closure of oil refineries in Saudi Arabia, Kuwait, the UAE and other countries due to the hostilities.

Brent’s relative resilience stems from fears of further supply disruptions, coupled with pent-up demand in Eurasia following months of conflict that was originally intended to be short-term. Initially, Europe and China preferred to adopt a wait-and-see approach as prices rose, but by October, sentiment had shifted: there was simply no further room to delay purchases.

Summary: Brent is falling more slowly than WTI: the risk of supply disruptions is supporting the premium, although exports from the Middle East are recovering. High oil prices and political risks are weighing on the Euro.