Oil: Supply risks and central bank inflation worries – BNY

BNY's Geoff Yu points out that the price of Brent crude has risen to around $110 as the Houthi forces advance near the Bab al-Mandeb Strait, creating concerns over Red Sea shipping and the larger supply chains. The report notes soaring U.S. diesel prices and International Energy Agency (IEA) projections of tighter global oil supplies, emphasizing that central banks like the European Central Bank (ECB) and the Federal Open Market Committee (FOMC) are grappling with mounting inflation risks that they cannot fully counteract through monetary policy alone.

The ongoing Houthi advance poses a threat of further price pressure, with any disruption to Red Sea transit affecting supply chains beyond energy. The upcoming U.S. Consumer Price Index (CPI) release is expected to anchor expectations ahead of the FOMC decision, but energy prices are already signaling a different inflationary regime.

U.S. diesel prices have surpassed $6 per gallon for the first time, and the FOMC is keenly aware of the broader inflationary impacts of diesel, despite its less conspicuous presence in consumer prices at the pump. The ECB recently increased interest rates as expected, but comments from several Governing Council members overnight indicate that markets should anticipate further increases, even if it is not the most favored policy direction.

The German Bundesbank's President, Joachim Nagel, specifically highlighted energy as the key driver for additional rate hikes. The IEA reported a sharp tightening in global oil markets in August. Worldwide oil demand is now expected to fall by 2.5 million barrels per day in 2026, which is 940,000 barrels per day more than the previous forecast, as stalled U.S.-Iranian negotiations delay the resumption of normal flows until next year.

On the supply side, global oil production declined by 1.6 million barrels per day on a month-over-month basis in August, with over 10 million barrels per day of Gulf output still offline. Total supply is projected to fall by 5.7 million barrels per day this year, before rebounding in 2027.