WTI holds gains above $98.50 amid Middle East supply risks
- WTI has jumped over 10% this month due to escalating hostilities in the Middle East and Eastern Europe.
- Mixed signals on U.S.-Iran talks and dismissed reports of an imminent deal created market headwinds.
- Despite 18 vessel attacks in the Strait of Hormuz, Middle East oil flows recovered to 80% of prewar levels.
West Texas Intermediate (WTI) oil price appreciates after two days of losses, trading around $98.60 during Asian hours on Wednesday. Crude oil prices gained ground as traders assessed mixed reports regarding diplomatic progress between the United States and Iran.
Although negotiations remain active, market momentum faced headwinds following high-level diplomatic engagements. Pakistan’s army chief, Field Marshal Asim Munir, met with senior Iranian diplomatic and military officials in Tehran to discuss bilateral ties and the status of talks with Washington. Clarifying the situation, a diplomat involved in the discussions confirmed that efforts to end the conflict are still underway, while dismissing reports that a final deal was imminent.
Despite these diplomatic uncertainties, oil prices have surged more than 10% this month, driven by compounding global supply risks. Intensifying hostilities involving Saudi Arabia, Iran-backed Houthi forces, Russia, and Ukraine have heightened geopolitical tensions, further compounded by at least 18 vessel attacks in the Strait of Hormuz over the past two weeks. Nevertheless, energy infrastructure has shown resilience, with Middle Eastern oil flows largely recovering to approximately 80% of prewar levels.
Brent climbs to fresh multi-month high
Strategists at Societe Generale highlight the renewed strength in crude, noting that Brent has “backed up to $111.2/b, highest since 20th May,” underscoring the latest push to multi-month highs in the oil market.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
Author
Akhtar Faruqui
FXStreet
Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.
