How oil prices could yet prove too slick for comfort

One of the biggest and most pleasant surprises of 2026 to date is the sanguine manner in which the oil price continues to respond to the ongoing tensions between America and Iran.

A barrel of the European benchmark product, Brent Crude, for one-month delivery trades at $72 a barrel at the time of writing, no higher than when the US and Israel launched their initial strikes on 28 February. After a brief surge to $120 a barrel, Brent is also no higher than five years ago, when the world was just starting to stagger out of lockdowns.

Renewed oil price weakness – or at least the marked absence of oil price strength – is a bonus for consumers’ confidence and spending power, as well as corporate input costs and thus profit margins across a range of industries. Add in expectations for modest interest rate increases, at worst, and two key sources of fuel for an equity bull market, cheap energy and cheap money, seem abundant – but advisers and clients still need to check that both will remain so on a sustainable basis.

The colour of money

For now, markets expect only modest interest rate increases from the US Federal Reserve, the Bank of England, and European Central Bank, even if there is a consensus that the Bank of Japan is behind the curve and should be doing more to rein in inflation.

Helped by the oil price’s retreat, the US five-year forward inflation expectation is just 2.2%. That is only a fraction above the US Federal Reserve’s target, despite an uncomfortable run of monthly readings above that level which dates back to early 2021.

If inflation expectations remain anchored, that could help the monetary authorities keep a lid on headline borrowing costs. It is also easy to see why central banks would wish to avoid any steep increases in interest rates, given the levels of borrowing across government, corporations, and consumers alike and therefore the likely hit to spending and growth that could follow.

Crude calculations

The oil price rocketed as war broke out in the Middle East earlier this year. However, the increase was neither as substantial or as sustained as the oil price shocks of 1973-74, 1979 and 1990, or even the bull run of the early 2000s, when strong economic growth, dollar weakness and concerns over supply after a period of low capital investment in response to the price collapse of the late 1990s combined to drive crude to an all-time high of $147 a barrel.

Calm quickly returned after Russia’s 2022 attack on Ukraine, too, with the result that the oil price had little lasting impact on global growth or monetary policy.

However, inflation remains above target to this day, to mock policymakers’ assertion of four and five years ago that this would prove a ‘transitory’ issue.

Energy prices could thus yet have a major say upon both the cost of money, the potential returns offered by cash and bonds relative to equities and thus financial markets.

The case for stable, or even weaker oil and gas prices is based upon four key thrusts:

• Supply will recover quickly once Tehran and Washington reach a peace deal, and grow as Iran returns to global markets, the Straits of Hormuz reopen and divisions within OPEC enable the UAE and others to boost their output. Long term, pipelines and alternative routes may diminish the importance of the Straits as a key conduit for hydrocarbons.
• US shale production continues to power ahead, to leave the US as the marginal exporter in the 2020s, in contrast to the 1970s when it was the marginal importer and thus a key driver of demand after the oil price alarms of 1973-74 and 1979.

• Demand growth will be muted, at best, as the globe manages a long-term transition to less carbon-intensive and more renewable sources of energy.
• The dollar remains the globe’s currency of choice and a haven during times of strife. A strong dollar is traditionally seen as negative for commodity prices, as it makes raw materials more expensive for non-dollar users.

Deep waters

There are, however, four counter-arguments:

• The ceasefire is fragile and the peace deal is yet to be signed, so the re-opening of the Straits of Hormuz could easily be delayed. It will also take time to repair the damage done to ports, production and refining facilities and get tankers in position to load, ship and unload.
• Oil’s price weakness in spring and summer is the product of how China and America in particular are using strategic reserves to dampen demand and calm prices. China has built up an inventory of more than one billion barrels to reduce its purchases in the open market this year, while America has run down its Strategic Portfolio Reserve to levels last seen in 1983. The US will surely need to rebuild the SPR at some stage, if only to protect itself from any future supply shocks. In addition, total reserves, including refined products, are one-fifth below 2020’s all-time high.

• Any further evidence of Presidential caprice, in foreign policy or domestic matters, or of galloping sovereign debt accumulation in the US could yet undermine faith in the dollar, at least on a relative basis. Past periods of oil price strength have tended to coincide with dollar weakness.
• Financial markets seem resolutely bearish on oil. Speculative positions in commodity futures markets show that traders have taken their largest shorts, at some 160,000 contracts, since 2016 and before that 2008. At 1,000 barrels a contract, it may therefore not take much by way of an upside surprise in oil prices to force the bears to run for cover and close out, to create more buying and add to any nascent price momentum.

Advisers and clients can use both checklists to see how their strategic portfolio allocations and positions could yet be affected, in the knowledge that the current consensus view leans toward the first one. As such, any major surprises are likely to come from the second list, and unexpected oil price strength, or at least renewed volatility.

Past performance is not a guide to future performance and some investments need to be held for the long term.