Oil prices exceed 100 US dollars
The price of Brent crude oil rose nearly 10% over the week and this week climbed above 109.8 US dollars per barrel. The main growth factor was intensified incidents in the Strait of Hormuz, which caused the oil price to exceed 100 US dollars for the first time since the escalation of the conflict.
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As geopolitical tensions rise, the International Energy Agency (IEA) has downgraded global oil market forecasts, significantly increasing this year’s demand decline estimate and warning that the normalization of energy resource supplies in the Middle East may be postponed to next year.
Uncertainty has also affected the natural gas market: Asian liquefied natural gas (LNG) prices rose above 28 US dollars per million BTU (British Thermal Unit) and reached the highest level since the end of 2022. At the same time, maritime transport rates have sharply increased, and on the main route from the Middle East to China, the daily earnings of large oil tankers approached a record 800 thousand US dollars. These changes indicate that the prolonged conflict in the region continues to increase energy resource price volatility, supply chain risks, and pressure on the global economy.
Before the winter season – gas supply shortage in Europe
Europe is approaching the upcoming heating season with a significant natural gas supply deficit. Storage facilities still lack more than 100 TWh to reach even a minimal 75% fill, and such a scale of supply deficit at this time of year was last recorded during the 2022 energy crisis.
The TTF price, considered the benchmark for the European gas market, currently fluctuates around 60 Eur/MWh, and some market participants forecast further growth in the fourth quarter.
The situation is complicated by prolonged supply disruptions: LNG flows through the Strait of Hormuz are recovering more slowly than expected, restrictions on Norwegian gas fields operations, Russian gas infrastructure affected by Ukrainian attacks, and possible labor disputes at French LNG terminals.
At the same time, Europe is intensively competing with Asian countries for LNG cargoes on the spot market (where gas is purchased at the current market price and settled within two days), and high prices in Asia further complicate the Old Continent’s ability to quickly replenish gas storage before the winter season begins. These factors increase the risk of energy price volatility and maintain pressure on the European energy market in the coming months.
ECB continues monetary policy tightening and does not rule out further interest rate hikes
The European Central Bank (ECB) raised the interest rate by 0.25 percentage points to 2.5% on Thursday. This is the second increase since rising energy prices due to geopolitical tensions in the Middle East intensified inflationary pressure in the eurozone.
This decision was not unexpected for market participants, but the ECB’s communication remained strict and signaled the possibility of further monetary policy tightening. The day after the decision, the head of the German central bank, Joachim Nagel, warned that to control inflation, interest rates might need to be raised to a level that would start significantly restricting economic activity.
Among the key factors that could determine further ECB decisions remain the dynamics of energy prices and their impact on inflation. Meanwhile, the latest ECB forecasts show greater inflationary pressure along with faster-than-expected economic growth, strengthening arguments for possible further monetary policy tightening in the coming months.
Strengthening yen poses risks to interest rate differential-based investment strategies
In recent weeks, the rapidly strengthening Japanese yen has again highlighted the risks associated with interest rate differential-based investment strategies, where investors borrow funds in a low-interest currency, usually yen, and direct them into higher-yield assets such as US stocks or emerging market bonds.
As the yen rises, the attractiveness and profitability of these strategies decrease, forcing some investors to reduce positions, realize existing assets, and repay financing. This increases the risk that a broader closure of such investment strategy positions could cause additional pressure on global stock markets and increase their volatility.
Investor caution is also reflected in capital flow data: according to Bank of America strategists, US equity funds have recently recorded the largest capital outflow in three weeks, while global equity fund flows remain significantly lower than in mid-summer. This signals weakening investor risk appetite and growing market sensitivity to currency exchange rate and monetary policy changes.
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