Traders are betting that oil prices will remain elevated for longer than they anticipated just weeks ago, threatening to prolong the inflationary pressures that businesses and consumers have weathered for months.
Why it matters: Oil inventories have helped cushion the blow from disrupted Middle Eastern supplies, but much of that buffer has been depleted since the war began.
- The possibility of sustained price pressures into next year throws into doubt the logic that central banks traditionally rely upon to look through energy price shifts — that they represent a one-time shift in relative prices, not an ongoing inflationary process.
- That leaves the global economy more vulnerable to another energy price surge, with potentially more lasting consequences for growth, inflation and interest rates than energy shocks of yore.
By the numbers: Oil futures for delivery in 2027 — contracts to buy or sell crude next year — have climbed to their highest levels since the Iran war began.
- Prices for January 2027 are up 17% since early September, to more than $97 a barrel.
- Markets still anticipate some relief next year, but considerably less than they expected just weeks ago. It's a reversal from late summer, when hopes of easing tensions with Iran and a recovery in Middle Eastern oil supplies briefly pushed futures lower.
- June futures have jumped 18%, to $88 a barrel, while December futures are up 13%, to about $81.
State of play: Crude oil exports from the Persian Gulf, including shipments through the Strait of Hormuz and alternative routes, surpassed prewar levels in the week ending Oct. 18, according to the Wall Street Journal. But the costly workarounds enabling that recovery have their limits.
- Those include ship-to-ship transfers outside the Strait of Hormuz, where security risks have deterred some vessels.
- "You're coming up against limitations on actually how much volume you can move out of the Middle East, even with these processes," Christopher Haines, global head of oil at Energy Aspects, tells Axios.
- Restoring confidence among shipping companies and insurers that vessels won't be attacked will be "exceptionally hard," Haines adds.
Zoom in: Economist Robin Brooks argues that oil prices reflect higher shipping costs and fears of further attacks more than actual shortages.
- Using earlier monthly data, he estimates that Persian Gulf crude exports had recovered to 91% of prewar levels, with a "temporary fear factor" adding at least $20 a barrel.
What to watch: The Trump administration is seeking to ease fuel prices ahead of the midterms, most recently by allowing more Russian diesel onto the market.
- But relief may be minimal: Ukrainian attacks have damaged Russian refineries, while sanctions complicate repairs, limiting additional exports, Haines says.
The bottom line: "The market narrative has shifted from "transitory" to "new normal" right before our eyes," Bob Elliot, chief investment officer at Unlimited Funds, wrote Wednesday morning.