Oil is still around $100 a barrel, up from about $70 before the US-Iran conflict began. You pay for that whether or not you drive, because fuel goes into the cost of almost everything that gets made or moved. Those costs feed inflation, and sticky inflation is why the Federal Reserve raised interest rates last month for the first time since 2023.
What's going on here?
Gulf crude oil exports have recovered since the conflict closed the Strait of Hormuz, even topping pre-war levels for part of September. Yet oil hasn't got much cheaper. Goldman Sachs says traders are still pricing in the risk of further disruption, and also points to how low the world's oil stockpiles have fallen.
Think of those stockpiles as an emergency fund used to keep fuel flowing. Saudi Aramco says about 1 billion barrels have come out of storage since the conflict began. Topping them back up means buying more oil than the world uses, and that may keep prices higher.
Crude oil also isn't much use until it's refined into petrol and diesel, and many of the region's refineries are out of action. Goldman estimates the Gulf's exports of those fuels are about half their usual level. That shortage is partly why the G7 countries are releasing 100 million barrels from emergency reserves, starting with diesel.
What's the takeaway here?
Goldman expects oil to fall to $85 a barrel by year-end, which is still above its pre-war level. If oil stays higher, inflation cools more slowly, and central banks have less room to lower interest rates. If it falls faster, that pressure eases. Forecasts can be wrong, though, so it helps to invest in a diversified portfolio that works wherever oil prices go.
(For an expert-managed portfolio that’s diversified across assets, see General Investing.)
In Other News: Where does a weaker jobs report leave the Fed?
The US economy added just 29,000 jobs in September, less than a third of the 90,000 economists expected, and unemployment edged up to 4.2%. The stock market rose anyway, with the S&P 500 gaining 0.7% and the Nasdaq touching a record high.
The figures for earlier months look weaker too. August's 162,000, which seemed like a comeback, has been cut to 133,000, and July has gone from a small gain to a loss of 10,000. Across the three months, hiring in the US has averaged about 51,000 a month.
Investors took this as good news because of what it means for interest rates. The Federal Reserve (the Fed) raised rates last month to fight inflation, and a second hike looked likely.
With hiring this soft, however, raising borrowing costs again risks slowing the economy, so traders now see a 16% chance of an October hike, down from 64% a week earlier. Higher rates squeeze company profits, since businesses pay more to borrow and their customers have less to spend, so a Fed that holds off is good news for shares.
That relief has limits. Inflation is still running at 3.4%, above the Fed's 2% target, and with oil near $100 a barrel, a December hike remains on the table. When the Fed meets in late October, it will have to choose between tackling inflation and protecting the jobs market.
Past performance is not an indicator of future returns. These articles were written in collaboration with Finimize.
What's next for markets in Q4?
In our Q4 Outlook webinar, our investment team shared two things they’re watching as we head into year-end: rising interest rates and the next phase of AI. Here are the key points.
- Why are long-term interest rates rising? Not because of inflation, and AI's impact is relatively modest. Our team sees three drivers instead: a strong economy, a tug of war between the US Treasury and the bond market, and Japan coming out of deflation.
- Where does AI go from here? AI investment continues, but it's concentrating in places that can address power, water and community concerns. And while most consumers have only used AI as a chatbot so far, consumer AI agents may be the next turning point.
If you missed the webinar, you can watch the full webinar replay on our YouTube channel.
