A sharp rise in oil and fuel prices this week has put inflation and recession concerns back at the center of market attention. Brent Crude climbed above $100 per barrel for the first time since July, while U.S. benchmark WTI Crude also moved past $100 as tensions between the U.S. and Iran escalated again.
According to Oilprice.com, the global and U.S. economies had remained relatively resilient through six months of war in the Middle East, despite severe disruption to oil and LNG flows through the Strait of Hormuz. That resilience was supported by releases from strategic oil reserves, China’s cuts to crude imports and fuel export restrictions, and demand destruction caused by already high prices.
Those buffers have now largely faded, the publication says. In the United States, crude holdings in the strategic reserve are at their lowest level since the early 1980s. At the same time, China has eased fuel export restrictions and returned to buying more crude after imports fell to a decade low in June.
Crude flows through the Strait of Hormuz have partially recovered to an estimated half to two-thirds of pre-war levels, but fuel supply remains severely constrained. Refineries outside the Middle East and Russia have not been able to make up for the lost supply, leaving fuel markets under heavier strain than crude prices alone would suggest.
As a result, diesel and gasoline prices surged at the end of the summer. In the United States, gasoline prices are at a record high for this time of year, when they would normally ease as seasonal demand fades. Diesel, often described as the economy’s main fuel, has now reached an average of $6 per gallon in the U.S. for the first time, after breaking the previous all-time record of $5.85 last week.
The article says the jump in energy prices is pushing up Treasury yields and longer-term borrowing costs, while the Federal Reserve could move as soon as next week to raise its key interest rate in anticipation of a new inflation shock. CME FedWatch data showed that as of September 10, traders saw a 72.4% chance of a 0.25-basis point rate hike at next week’s Fed meeting, up from 49.4% a week earlier.
Goldman Sachs, however, does not yet see recession as the central scenario. The bank now puts the probability of a U.S. recession within 12 months at 15%, down from 30% in March, when the Middle East conflict began. Goldman Sachs Chief Economist Jan Hatzius told Yahoo Finance that another major energy shock would lead the bank to raise that estimate again.
Hatzius said Goldman Sachs currently expects about 1.5% GDP growth in the second half of the year, but that forecast does not include another significant shock. A major rise in gasoline prices would directly erode consumers’ real incomes and weigh on spending, he said.
Market participants are also focused on diesel’s role in broader inflation. Patrick De Haan, head of petroleum analysis at GasBuddy, said record diesel prices will feed through to every cargo movement, shipment and delivery, likely reigniting inflation across the supply chain. In his view, Americans should prepare for a more expensive holiday season, with geopolitical tensions still acting as a main driver of energy prices.
