Brent crude prices retreat as Middle East tensions ease, while the US dollar and Treasury yields decline ahead of Tuesday's critical CPI inflation data.
Brent has fallen more than 20% from its late-October highs to its lowest levels since August as investors price out the geopolitical risk premium, while production and export volumes return to pre-war levels and tanker charter costs fall from $79.6 million to $45 million. Trump's comment that a resumption of Middle East hostilities is unlikely reinforces the sell-off. Risk: Iran still attacks tankers in the Strait of Hormuz and the US midterms could harden Tehran's stance, which would send prices back up.
The US dollar fell around 0.5% on Monday, giving up the gains made after Friday's strong employment figures, and Treasury yields resumed their decline. The dovish shift tied to falling oil and de-escalation hopes weighs on the currency. Markets are now waiting for Tuesday's US CPI release, which could reverse the move.
Treasury yields resumed their decline after a brief rally, driven by Brent's sharp fall to its lowest levels since August amid Trump's comments that renewed Middle East hostilities are unlikely. Falling oil reduces inflation expectations, supporting lower yields. Tuesday's CPI release is the key risk that could reverse this move.
Brent crude has dropped over 20% from late-October highs, reaching its lowest levels since August as markets price out geopolitical risk. OPEC production has recovered to 22.87 million barrels per day, while supertanker charter costs have plummeted to $45 million from $79.6 million last month.
Investors are removing the geopolitical risk premium from prices: oil is down more than 20% from late-October highs, production and exports are returning to pre-war levels, and shipping costs are dropping.
A breakdown in diplomacy and a resumption of hostilities in the Middle East would push the price per barrel back up, especially given continued attacks on tankers in the Strait of Hormuz.
It gave back the gains from Friday's strong employment figures as Treasury yields resumed their decline alongside Brent's sharp fall.
Brent's sharp drop to levels last seen in August is easing inflation expectations, and investors resumed buying bonds after a brief rally paused the decline.