Strategic Outlook

Crude came back through Hormuz without a settlement, helped by US escorts and pipeline redirection, and energy costs stayed high: Europe pays mainly through energy, investors through higher interest rates, and the decision point is after 3 November

In September crude came back through Hormuz without a settlement, helped by US escorts and pipeline redirection; the supplies that set Europe's gas and diesel prices did not, and energy costs stayed high.

Crude through Hormuz returned to its pre-conflict level in the week to 28 September, about 13.5 million barrels a day according to Kpler data reported by CNBC, as US escorts boosted shipments and pipelines redirected flows; refined products ran at about a fifth of normal. Qatar's LNG stays under force majeure through November.

Brent peaked at $108.75 on 15 September and ended at $103.53, about 5% below that peak and well above its start. European gas changed little over the month and is about two and a half times its level at the end of last year. Europe pays mainly through energy, its gas price set at the margin by the LNG that has not come back.

Investors pay through interest rates. The ECB raised its deposit rate to 2.50% on 10 September, tying the rise to the conflict; the Fed raised on 16 September citing inflation and activity, its Chair adding geopolitics. The euro-area two-year yield, the basis for new fixed-rate euro borrowing, rose 0.35 percentage point to 3.21% by 29 September. In the US the rise sat in the inflation-adjusted yield, at 2.91%, not in inflation compensation. The euro fell 2.1% to $1.1355, raising the euro value of unhedged dollar assets.

The base case to early November, more likely than not because the two sides' order of steps does not meet and the US is reported to look past the 3 November elections, is no signed US–Iran text, crude near its pre-conflict level, products and LNG restricted and oil well above its start. A phased deal before the elections would lower oil and freight; because the ECB tied its rise to the conflict while the Fed led with inflation and activity, euro-area rate expectations would fall more than US ones, widening the US–euro-area yield gap, and the euro could weaken by that channel, though lower energy import costs would work the other way. A signed text settling the order of steps, or an attack cutting crude flows despite the escort, would change the view. It remains unclear whether the crude recovery can last without a settlement.