Oil: Limited war risk keeps Brent capped – DBS

DBS Group Research’s Philip Wee notes that recent Iranian strikes on shipping in the Strait of Hormuz pushed Brent crude from $72 to $76 per barrel and lifted US Treasury 2Y yields, but markets still see no return to full-scale war. With Brent below $80 and far from $120, he argues oil-driven inflation and policy risks remain contained for now.

Brent reacts to Hormuz tensions

"Iran launched fresh strikes against commercial shipping vessels in the Strait of Hormuz, prompting the US Treasury Department to revoke licenses allowing Iran to sell oil globally."

"Brent crude surged from $72 to $76 per barrel on Tuesday, sending the US Treasury 2Y yield higher to 4.185% from 4.12%. With Brent still below $80, the 2Y yield was capped at June’s high of 4.234%."

"For now, the market is keeping to the playbook that Tehran and Washington are still in a high-stakes game to gain leverage during the temporary truce, and that Tuesday’s incident would not descend back into a full-scale war."

"However, the incident was a reminder that the real risk remains the expiry of the interim ceasefire agreement in mid-August and the red line over transit fees in the Strait of Hormuz."

"With Brent still significantly below $120, Fed Chair Kevin Warsh is unlikely to change his recent view that “inflation risks have come down” at next week’s congressional testimony."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)