Bianca Botes, Managing Director of Citadel Global
Brent crude broke $100/barrel on Wednesday for the first time since July and added a further 3.7% on Thursday to trade near $105/barrel, leaving the benchmark up around 70% for the year. The level alone is not the news, since Brent has oscillated between $70/barrel and $102/barrel all year. What changed this week is that a series of institutions, each for its own reasons, conceded that the energy shock is not a temporary dislocation to be looked through but a durable feature of the coming quarters.
Trump’s theory
In Washington, United States (US) President, Donald Trump, predicted – ahead of the Republican convention in Dallas – that the war with Iran would end immediately after the 3 November midterms, arguing that Tehran is prolonging the conflict to influence the vote. He conceded that fuel prices are unlikely to fall before then, and that a negotiated settlement, while possible, is not being pursued. The forecast deserves scepticism, given that when the campaign began on 28 February the expectation was that it would only last for a few weeks, but the market now has a political date, attached to a military escalation that has lasted for eight weeks in which no de-escalation has been sought.
Saudi Arabia’s output squeeze
Riyadh reported to the Organisation of the Petroleum Exporting Countries (OPEC) secretariat that August crude production fell by 1.9 million barrels a day to 6.238 million, the lowest level since the Gulf War in 1990, with exports down to 3.2 million barrels a day according to global maritime intelligence and real-time vessel monitoring, Kpler’s tracking and was at its weakest level in 13 years. This is not production discipline. The Saudi kingdom is not withholding barrels but losing them to closed export routes, with the Strait of Hormuz flows down below two million barrels a day against eight million to nine million before hostilities resumed. Supply to market, at 7.122 million barrels a day, exceeded production, so the shortfall is being covered out of inventory, and the wider position offers little comfort, with the Organisation of Economic Co-operation and Development commercial stocks at 2.73 billion barrels on the latest available June reading, some 67 million below the five-year average and 219 million below the 2015 to 2019 average. Nominal spare capacity approaching 10 million barrels a day is no buffer while Hormuz is closed, since quotas can be raised on paper without barrels reaching a buyer, which is why OPEC+ left October targets unchanged.
Europe’s oil shock
The European Central Bank (ECB) raised rates by 25 basis points on Thursday, taking the deposit facility to 2.50% and the main refinancing rate to 2.65%, after August eurozone inflation printed at 3.3% with its energy component at 14.3%. ECB President, Christine Lagarde, suggested that inflation will stay above target through the first half of 2027 and acknowledged that the oil shock is feeding into core and food prices, abandoning the doctrine that central banks look through supply-driven increases. Eurozone markets now carry an implied terminal rate above 3%.
The Fed’s rate dilemma
Next week the US Federal Reserve (Fed) is expected to raise rates, and Thursday’s Producer Price Index (PPI) data strengthened the case for it. August producer prices rose 0.4% on the month, lifting the annual rate to 5.4% from a revised 4.8% in July against consensus of 5.3%, with final demand goods up 1.1% against services up only 0.1%. The composition matters because wholesale energy rose 4.2% and diesel alone climbed 24.1%, accounting for over a third of the monthly rise in goods prices, while core producer prices, excluding food and energy, rose only 0.2% against 0.3% expected. Wholesale inflation is accelerating on energy while the core decelerates, the clearest evidence yet that this remains a goods shock rather than a services one and the moment services follow, the argument for looking through it collapses. Initial claims for the week to 5 September came in at 206,000 against 205,000 expected and continuing claims eased to 1.774 million, leaving a labour market that offers the Federal Open Market Committee (FOMC) no cover for restraint ahead of the 15 and 16 September meeting, with August Consumer Price Index (CPI) due out today and futures carrying roughly two-thirds odds of a hike.
The US Bond on the up and up
The bond market has drawn its own conclusion. The 10-year US Treasury yield reached 4.85% on Wednesday, its highest level since 2023, then added a further nine basis points on Thursday to 4.93%, roughly 90 basis points above where it stood a year ago. The Treasury tripled its buyback of longer-dated paper to as much as $6 billion and the market barely acknowledged it, the second failed attempt this cycle to lean against the long end by operation rather than tighter policy. Supply explains much of the indifference, with AI-related corporates having raised over $1.5 trillion in new debt, Tokyo selling Treasuries to defend the yen, and President Trump promising in Dallas a $5,000 payment to every American should Republicans hold Congress, costed above $1 trillion. A long end that will not respond to buybacks while energy costs rise and issuance expands is the most important signal in the week’s real-time data stream, and with the US Dollar Index (DXY) near 99, the dollar is taking its direction from that repricing rather than from risk sentiment.
South Africa staring down the barrel
While all of this is playing out, the rand has traded with a composure its history would not predict, holding around R16.10/$ to R16.20/$ and close to its strongest level since the war began in late February, but Thursday’s domestic data withdrew much of the justification for it. The second quarter current account swung into a deficit of R205.5 billion, or 2.6% of the country’s gross domestic product (GDP), from a surplus of R181.6 billion and 2.3% of GDP in the first quarter, a reversal of nearly five percentage points of output in three months and the clearest measure, yet, of what the energy import bill is costing South Africa.
The commodity cushion is thinning at the same time, with July gold production down 7.4% year-on-year after a 6.2% gain, and total mining output down 7.5%, so the high prices that have supported the terms of trade are being earned on falling volumes, while gold itself having slipped below $4,360/ounce. Domestic markets took the point, with the JSE All Share Index down 1.07% on Thursday and the 10-year South Africa Government Bond up to 8.89%. The rand has in any event absorbed only part of the shock, since roughly 80% of the R1.34 petrol increase and 93% of the diesel increase which took effect on 2 September came from international product prices rather than the exchange rate. Brent averaged $91/barrel in August against $84/barrel in July and September is tracking well above both, pointing to another increase on 7 October, while the South African Reserve Bank (SARB) meets on 23 September with the repo rate at 6.75%, having passed on the oil shock in both April and July.
What does the fourth quarter hold?
As we head towards the tail end of this year, the political calendar has created genuinely two-sided risk into the fourth quarter: a credible ceasefire after 3 November moves crude sharply lower and the rand firmer, continued escalation does the opposite, and neither is forecastable with confidence.
ENDS
