International oil prices experienced broad volatile trading last week, largely erasing a sharp correction seen on Monday by the end of the week. This was primarily driven by geopolitical tensions between the United States and Iran. Although prices opened higher then drifted lower towards the weekend, the overall trend remained within an upward channel.

On the political front, the situation in the Middle East intensified further around military confrontations between Iran and the US and its allies. Donald Trump publicly stated on social media that the US is prepared to confront Iran with a level of military deterrence, power, and strength not seen since World War II, and announced the conclusion of a large-scale strike operation against Iran by Friday. In response, Iran launched multiple rounds of missile attacks against the US and suffered US strikes on its border with Iraq. After rejecting Oman's proposal for joint management of the Strait, Iran stated that the Strait of Hormuz would not reopen if the US continues to threaten and interfere with regional maritime activities. The statements from both sides last week indicated a potential for further escalation of the conflict, which contributed to the rebound in oil prices.

However, it is worth noting that despite the ongoing exchange of fire, both sides have not completely closed the channels of communication. The US expressed hope for reaching a new agreement with Iran, while Iran engaged in negotiations with Oman. This could potentially provide an opportunity for de-escalation in the future.

On the financial side, the Federal Reserve's July meeting concluded with a pause in rate hikes, as expected by the market. However, the meeting minutes revealed three dissenting votes, indicating a lack of consensus within the committee. Notably, Christopher Waller stated that controlling inflation at 2% remains the Fed's core objective but also suggested that if inflation continues to rise, rate hikes would be part of the policy toolkit. This has strengthened market expectations for rate hikes at the remaining meetings this year, especially considering the rise in the Q2 PCE price index. Expectations for a September rate hike have increased, with some even speculating on a larger magnitude. This could put downward pressure on dollar-denominated crude oil prices from a financial perspective.

On the commodity front, the US-Iran conflict has impacted the Strait of Hormuz. While some tankers have resumed transit, the overall recovery remains limited and has not returned to pre-conflict levels. The recent intensification of conflict has raised market expectations of further disruptions to shipping through the Strait, which will likely keep the overall supply of crude oil relatively tight going forward. On the other hand, the OPEC+ meeting over the weekend agreed to increase the September oil production quota by 188,000 barrels per day. This means the production cuts implemented since 2023 have been nominally fully offset by the production increases seen over the past year. However, in reality, while the OPEC+ production increase plan is in place, the actual ability of producing countries to get oil to the international market in the short term is limited by the current situation in the Strait of Hormuz. If Persian Gulf shipping capacity gradually recovers as the US-Iran conflict de-escalates, it could provide a significant supply surplus to the international market and offer additional controllable capacity for producing countries, which is worth monitoring.

In summary, the recent trajectory of oil prices will continue to be driven primarily by the geopolitical situation between the US and Iran. While from a commodity perspective, many producing countries maintain high output policies, the constrained shipping capacity through the Strait keeps the supply side relatively tight. Meanwhile, rising expectations of interest rate hikes are capping the upside valuation. Therefore, for oil prices, the future evolution of the US-Iran situation will be crucial in determining both the direction and the magnitude of price swings. The recommended strategy is to focus on short-term, range-bound trading, avoiding heavy directional bets. Investors could also consider buying out-of-the-money options on both sides with a light position. This is for reference only.