Oil prices heads for 10% weekly surge as Strait of Hormuz risks mount

Brent crude prices approached US$96 per barrel on Friday, indicating a near-9% weekly increase. This surge is driven by heightened tensions between the United States and Iran, which pose a threat to oil shipments through the Strait of Hormuz. US crude prices climbed to around US$92 per barrel, with traders assessing the risk of a prolonged disruption in this critical waterway.

The United States launched fresh strikes against Iran this week, prompting Tehran to retaliate by targeting US bases and vessels in the region. Consequently, only six commodity vessels transited the strait on Wednesday, a significant decrease from 11 on Tuesday and below the 10-day average of nearly 13. The supply outlook is further clouded by damage to Middle Eastern and Russian refineries, as well as limited spare capacity elsewhere, which could hinder producers' ability to compensate for disruptions.

This situation is expected to keep global fuel prices elevated into next year. US diesel prices reached their highest level since mid-2022, while European inventories remain below seasonal norms. The oil surge has also complicated inflation and monetary policy outlooks. Meanwhile, the US Dollar Index fell below 99, its lowest level in over a week, following Fed Governor Christopher Waller's comments suggesting he might support maintaining current interest rates if inflation continues to improve.

Waller expressed optimism about disinflation but warned that a reversal in August could lead to a rate hike. Market expectations for a September rate hike have dropped to around 50%, down from 63% earlier in the week. The Japanese yen's sharp appreciation has also weighed on the dollar, with USD/JPY falling by about 2% to around 155.45.

Investors are now awaiting the US non-farm payrolls report to gain further insights into the Federal Reserve's next interest-rate decision.