Still no good news from the Middle East

The US entered Labor Day with average gasoline prices at $4.14 a gallon, almost $1 higher than a year ago, while diesel hit a record $5.85 as the Middle East crisis drags on.

Despite the US president claiming full control over the Strait of Hormuz in early August, only about 10 commercial vessels a day have passed through the strait over the past 10 days, the lowest level since May and down from more than 15 just days earlier as attacks in the area picked up.

Moreover, Yemen’s Houthis attacked energy facilities and cities in Saudi Arabia on Tuesday, prompting the Saudi Energy Ministry to say that operations at some energy facilities had been suspended.

And then there’s the Russia-Ukraine war, with Ukraine continuing to target Russian refineries.

Why haven’t oil prices jumped above $100 a barrel?

On the one hand, alternative routes are helping keep supplies moving through Saudi Arabia, Iraq, the UAE, and Egypt, along with rising output from the US, Canada, and Guyana. On the other hand, weaker Chinese imports and softer global demand are helping keep prices in check.

Still, Goldman Sachs warns that oil could jump to $120 if attacks on tankers intensify and export disruptions worsen, subsequently pushing up the cost of everything from oil-based products to transportation and, eventually, food and delivery.

Hence, the risk of tighter monetary policy from central banks, including the Fed, which has around a 60% chance of hiking rates next week following stronger-than-expected labor data. If Friday’s August inflation also comes in hotter than expected, those odds would rise even further.

In Europe, with inflation rising to 3.3% in August from 2.9% in July, markets are pricing in another ECB rate hike from 2.25% to 2.50% at Thursday’s meeting. As for President Christine Lagarde, she will most likely avoid giving any direct hints on further moves, stressing that they will depend on the incoming data.

In Japan, the BOJ is also expected to raise its key rate to 1.25% at its September 17–18 meeting, keeping its hawkish stance and adding to the yen’s recent strength, which is putting pressure on the USD JPY pair.

Overall, the mood has shifted back toward higher rates, which is why we’re seeing more nervousness in global bond markets. The longer yields stay high, the greater the risk of money moving out of riskier assets and into bonds. For now, though, markets are holding up well.