Here's a look at what happened in oil markets in the week of August 17-21 and what the focus will be in the days to come.
OVERVIEW: Oil prices are headed for another weekly gain as stalled talks to reopen Hormuz and U.S. threats to launch a major economic campaign against Iran keep the geopolitical risk premium high. Brent crude, the global oil benchmark, is trading above $93 a barrel, while West Texas Intermediate futures are at around $86 a barrel. The benchmarks are up 6% and 5% on the week, respectively.
MACRO: Investors viewed the U.S. Treasury's plans to expand bond buybacks to lower long-term yields as a sign of stress in the bond market, sparking a fresh round of dollar selling. The move also raised questions about the government's borrowing costs and fiscal position. Meanwhile, markets have scaled back expectations for higher interest rates following recent U.S. economic data. According to CME Group's FedWatch tool, traders are now pricing in a 65% probability that the Federal Reserve will leave rates unchanged at its next meeting.
GEOPOLITICAL RISKS: With talks to end the Iran war showing few signs of progress, the risk of further disruption to regional energy flows continues to support crude and refined product prices.
Trump said Wednesday he would launch a major economic campaign against Iran and any entity that does business with the regime, pushing oil prices higher. More details are expected on Monday.
"Is there a difference between armed conflict and economic warfare? The market does not think so, as crude oil rallied nearly $2 on the news," Tamas Varga, analyst at brokerage PVM Oil said. "After all, it will not rob Iran of the possibility of retaliating, keeping Hormuz shut, and targeting regional energy infrastructure and shipping."
SUPPLY AND DEMAND: Despite the recent rise to around $94 a barrel, oil prices remain well below the annual high of just above $125 reached in late April. Prices have been contained by the various ways Gulf oil exports have continued to reach markets, as well as weak buying from China, according to analysts.
Meanwhile, EIA's inventory data show a mixed picture. Crude stocks have recovered over the past two weeks following a substantial build, but supplies of refined products have tightened. Gasoline inventories are about 5% below the seasonal average, while middle-distillate stocks, including diesel and heating oil, are nearly 13% lower.
WHAT'S AHEAD: Looking ahead, markets will remain focused on developments around the Strait of Hormuz and their impact on oil supplies. On the economic calendar, attention will turn to the U.S. PCE inflation data, due Wednesday, which could provide fresh clues on the Federal Reserve's interest-rate path.