Oil prices surge above $105 amid geopolitical tensions and supply disruptions

What happened

Oil prices surged, with Brent crude surpassing the $105 per barrel mark. This appreciation was driven by a confluence of factors: reports that US President Donald Trump was considering options for attacks against Iran before the midterm elections, new incidents involving attacks on vessels in the Strait of Hormuz, and the interruption of approximately a quarter of oil production in the Gulf of Mexico due to a hurricane. Brent crude for December delivery rose 5.04%, reaching $105.26 per barrel, while WTI for November advanced 5.01%, to $92.69.

Why it matters

The spike in oil prices reflects a growing perception of supply scarcity and a significant increase in geopolitical risk. The possibility of US military action against Iran, coupled with attacks on ships in the Strait of Hormuz – a crucial maritime route for oil transport – and climate-related production disruptions, creates a scenario of uncertainty that tends to raise energy costs globally. This could have a substantial inflationary impact, pressuring central banks to maintain tighter monetary policies for longer, or even consider further tightening, which, in turn, could slow global economic growth.

Market impact

• Interest rates and bonds: Rising oil prices tend to increase inflation expectations, which can lead to an increase in government bond yields (Treasuries and others). Investors may demand higher premiums to compensate for the erosion of future purchasing power, pushing long-term interest rates higher.
• Dollar and exchange rates: In times of greater geopolitical uncertainty and global inflationary risk, the US dollar tends to strengthen as a safe-haven asset. Emerging market currencies, including the Brazilian real, may depreciate against the dollar, especially if there are concerns about the inflationary impact of oil on domestic costs.
• Equities: Higher oil prices, by increasing production and transportation costs, can negatively impact the profit margins of many companies, especially those in the transportation, manufacturing, and retail sectors. This, coupled with the risk of economic slowdown and tighter monetary policies, tends to put downward pressure on global stock markets. Energy sectors, however, may benefit.
• Commodities: In addition to oil, other energy commodities may see their prices rise. Agricultural commodities and industrial metals may have a mixed impact, depending on their sensitivity to inflation and global growth. Gold, as a safe-haven asset, may appreciate in scenarios of greater uncertainty.
• Brazil: Brazil, as an oil producer and exporter, may see a positive impact on its trade balance and revenues for companies in the sector. However, higher oil prices also pressure domestic inflation (especially fuel), which could lead the Central Bank to be more cautious in monetary policy, affecting expectations for the Selic rate and potentially limiting the scope for interest rate cuts. The Ibovespa may feel the weight of the global scenario, but with some support from commodity-linked companies.

What to watch

The next steps of the US government regarding Iran, any new statements from the White House or the Pentagon, and the evolution of attacks on vessels in the Persian Gulf will be crucial. Monitoring the hurricane's trajectory in the Gulf of Mexico and the recovery time for oil production in the region will also be important. Furthermore, the reaction of other countries and economic blocs to this escalation of geopolitical tensions will be a factor to watch.

Scenarios

Base Case (Citi): De-escalation of geopolitical tensions before the end of the year, leading to a drop in oil prices. This would ease inflationary pressures and could allow for a more flexible stance from central banks. Risk Scenario: Continued escalation of geopolitical tensions, with possible military actions and prolonged supply disruptions. This would keep oil at high levels, intensifying inflation and increasing the risk of a global recession.

Original source: Valor Econômico. For information only, not investment advice.