Not out of the woods yet

We are not out of the woods yet.

Brent is back above $100 a barrel as renewed US-Iran hostilities have brought the risk of further disruptions through the Strait of Hormuz back to the forefront. Oil remains below its April peak, but the renewed escalation shows how quickly the energy risk premium can return.

The consequences go beyond the oil market. First, inflation: a prolonged period of higher energy prices would slow the disinflation process and eventually work its way through transport, production and consumer prices. Second, politics: with the US midterm elections approaching, gasoline prices are once again becoming an important economic variable for the American consumer and therefore for Washington.

Perhaps even more important is what is happening further down the barrel. Diesel prices have risen even more sharply than crude. Diesel is the fuel of trucks, freight, agriculture and much of European industry. Higher diesel prices therefore travel through the economy faster than the oil price itself and can put renewed pressure on corporate margins and inflation.

Markets may have become accustomed to the conflict. Energy markets clearly have not.