Yesterday, the rally in US crude paused for a minute after Pakistan’s Defence Minister said that they were getting 'close to some sort of arrangement', but the relief remained short-lived after Iran added that the Strait of Hormuz would remain closed until the conditions it demands from the US are met. And the conditions that both parties demand from each other suggest that the problems won’t be solved by tomorrow.

Meanwhile, US strategic oil reserves continue to decline, and the IMF warns that current crude oil prices don’t reflect the severity of the oil supply shock that the world is going through.

'Less demand, more production, and inventory drawdowns prevented a larger price spike. But buffers are running low, leaving the world weaker when the next shock comes,' it said in its latest blog post. And the disruption in terms of barrels that can’t sail through is notable: at the comparable stage, it dwarfed the 1973 oil shock, the Iran-Iraq War and the Gulf War.

I mentioned yesterday that the crude oil market is back in backwardation, meaning that spot prices are rising faster than futures prices as buyers are willing to pay a premium to get their oil immediately. As such, the ongoing Middle East disruptions continue to pressure oil prices higher, and the deteriorating supply outlook will likely help oil extend recent gains toward $90–95pb for US crude and $95–100pb for Brent crude.

But of course, this is not an easy trade! Any headline – founded or not – moves the market very quickly, wiping out gains and clearing positions. Therefore, energy stocks are a better alternative for those willing to maintain exposure to the ongoing energy crisis and take advantage of the volatility.

Exxon and Chevron made around $26.5bn in Q2 alone amid the Middle East disruptions, while European oil majors earned around $24bn in profit. And European majors have an extra weapon in their hands: they have large trading operations that allow them to profit not only from higher energy prices but also from moving oil around the globe to take advantage of geographical price gaps and arbitrage opportunities.

SPDR’s energy ETF has been outperforming the technology ETF since the start of this year. It is an interesting hedge against both the technology selloff – due to AI worries building around Big Tech companies and their massive spending – and the inflation risks stemming from the Middle East war.

All eyes are on the US CPI release

Both headline and core inflation metrics may have eased in July thanks to a notable pullback in energy prices, yet oil prices have rebounded since then. US gasoline prices, for example, fell sharply before rebounding from their August dip.

Hence, today’s US CPI print will give an idea of how fast inflation could fade when the Iran war is over and the upside pressure on energy prices fades for good. But it won’t tell us what the Federal Reserve (Fed) should do next, as next month’s figures will again be tainted by a rebound in energy prices. The EIA hiked its gasoline and diesel forecasts for 2026 by 3.7% and 5.4%, respectively, and increased its 2027 forecast for retail prices by 6.5%.

Besides energy, the significant rise in chip prices is also expected to keep pressure on both consumer and producer prices. Morgan Stanley predicts that “chipflation” could add 0.10 percentage point to headline CPI and significantly increase prices for PCs and smartphones.

Indeed, the annual change in electronic component prices is skyrocketing: it rose 27.6% in June from the same time last year – by far the largest increase on record since 1966. In comparison, this metric rose less than 20% during the 1980s, when PCs boomed, and around 5% during the pandemic disruption months.

As such, whatever the data says today, the upside risks to inflation won’t fade. But if the numbers are softer than those pencilled in by analysts, we might well see a rally in both bonds and stocks, as the earnings season is going surprisingly well for US and European companies. The former are on track to print 50% earnings growth, while the latter are enjoying 22% earnings growth despite the energy shock.

Sweet spot?

And even though Europe’s problems have only gotten worse with this summer’s abnormally hot temperatures, drying rivers and further disrupting transport within the continent, earnings expectations for Stoxx 600 companies keep rising!

Many point out that European stocks are now in a sweet spot: European growth remains subdued but better than feared, yet not strong enough to encourage tighter European Central Bank (ECB) policy; corporate earnings are growing at the fastest pace in four years – though that number is of course skewed higher by the outperformance of energy and banks amid volatile energy prices and tech trades – and European bonds are outperforming their US peers amid spiralling US debt, the Middle East war and increasingly opaque and unpredictable Fed policy.

The EURUSD returned to its highest levels in two months, not on the back of a hawkish ECB/Fed divergence but due to a renewed loss of appetite for US Treasuries and rising US yields.

And the USDJPY’s rebound toward the 160 level is only adding fuel to the fire, as the weaker yen revives worries about Japanese UST sales – which were very notable between April and May – and adds further upward pressure on US yields.

What happens next is anybody’s guess, but it’s worth noting that the markets have been very resilient to the Middle East uncertainties, the tech fatigue, the US fatigue and European energy and climate problems.