Oil Shipping Costs Surge Amid Red Sea Tensions and Rate Hike Fears
Market Overview and Key Developments
A look at the day ahead in European and global markets from Wayne Cole.
Red Sea Tensions and Oil Shipping Disruptions
Brent is back above $107 a barrel as the Houthis close in on the Bab el-Mandeb, the other key channel for oil exports coming out of the Middle East. Ship tracking sites show vessels are still using the narrow waterway at the southern entrance to the Red Sea, but the Houthis have reportedly warned they would strike Saudi Arabian ships that tried to pass.
Impact on Shipping Routes and Costs
Tankers can still go through the Suez Canal and around Africa to get to Asian markets, but that adds 22 days to the trip and a lot to the cost for hiring and fuel. Tanker rates hit record highs last week, while bunker fuel has been in short supply, adding to the cost of shipping. Around 80% of the world's trade travels by ship.
Pipeline Vulnerabilities
Saudi Arabia's vital East-West oil pipeline, the kingdom's main alternative to the Strait of Hormuz, was also hit by drone attacks launched from Iraq, and that had been carrying 4 million to 5 million barrels per day (bpd).
Diplomatic Setbacks
Further disappointment came when a meeting between Iran and other Persian Gulf powers scheduled for Monday to discuss a safe channel through the strait was postponed.
Oil Price Movements and Market Reactions
That left Brent up 3% at $107.81 a barrel, with U.S. crude climbing 2.9% to $102.94.
Central Bank Policy and Rate Hike Expectations
Federal Reserve Outlook
The prospect of prices staying high is exactly what the Federal Reserve does not need as it meets this week, with markets now 86% priced for a hike of 25 basis points on Wednesday, the first rise since mid-2023.
Shift in Investment House Forecasts
Most of the major U.S. investment houses, including Goldman Sachs and JPMorgan, switched to a hike on Friday, with even Citi shifting from a long-standing call for cuts to concede one rate rise was likely this week.
Fed Credibility and Market Impact
Investors see this as a test of the Fed's credibility under Chair Kevin Warsh, though it's likely to draw the ire of President Trump who continues to make the novel argument that the U.S. should have the lowest rates in the world.
Bond Yields and Future Rate Path
Such is the concern about inflation that a steady rate decision would likely see longer-dated bond yields rise further, with the 10-year already just a whisker from the psychological 5.0% bulwark. Assuming the Fed does hike, the focus will switch to the dot plots to gauge the chance of further moves and to Warsh's media conference.
Investors know the Fed rarely ever just hikes once, so futures are pricing in around 90 basis points of tightening by the second half of next year.
Other Central Bank Meetings
Markets also imply around a 76% chance the Bank of Japan will raise its rates by 25 basis points to 1.25% on Friday, and likely sound hawkish on further tightening if only to shore up the yen.
The Bank of England meets on Thursday and markets imply only a 25% chance of a hike, though the decision is again likely to be a split one.
Broader Market Sentiment and AI Concerns
As a final note, concerns about the dangers of AI seem to be biting a little more with even OpenAI Chief Executive Sam Altman warning of a 10% risk AI could cause human extinction by decade's end. Mounting political pressure to slow work on AI was blamed for falls in tech shares in Japan and South Korea, with SoftBank a notable loser.
Key Events to Watch
Key developments that could influence markets on Monday:
- Appearances by ECB President Christine Lagarde, ECB board members Isabel Schnabel, Piero Cipollone and Pedro Machado
(By Wayne Cole; Editing by Jacqueline Wong)
