Focus on Oil, Gas, and Inflation

The recent escalation of tensions between Israel and Hamas has raised concerns about stability in the Middle East. This has put the focus on three key risks: oil, gas, and inflation.
The Strait of Hormuz is a narrow waterway through which about 20%-30% of the world’s oil supply flows. A full conflict between Israel and Iran could put the safety of this channel at risk, disrupting global oil supply.

Israel also has sizeable gas fields offshore. A broader regional conflict could risk gas supply out of Israel, especially during the upcoming winter months when demand is expected to spike.
In addition, a broader regional conflict could also impact important transport channels like the Suez Canal. A disruption to flows in the canal could lead to another supply-chain inflation scare for the global economy.

US Inflation Data

The US will release its inflation data for September this week. This data will be closely watched by markets, as it could have a significant impact on the Fed’s policy trajectory.
The consensus forecast is for headline consumer prices to increase by 0.3% MM in September, down from the 0.6% increase in August. However, core inflation, which excludes volatile food and energy prices, is also expected to increase by 0.3% MM.
The recent rise in oil prices is expected to buoy the headline inflation number, but underlying inflationary pressures are likely to be more muted. Moody’s suggests that inflation is set to soften towards the end of the year, but the transition may be less smooth than in recent months.

The market’s response to the inflation data will depend on how it compares to expectations. An overshoot in core prices could bolster hawkish sentiments, nudging market expectations to align more with the Fed’s own projections of a November hike. Conversely, a downside surprise might lend credence to a more dovish outlook and back the money market pricing which right now only sees a 22% chance of a November hike by the Fed.

This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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