DBS Group Research strategist Eugene Leow highlights that ongoing drawdowns in oil inventories, particularly in the United States, are likely to keep oil prices and global yields supported, even if a US-Iran deal leads to the reopening of the Strait of Hormuz [1]. Leow points out that while recent optimism regarding a potential US-Iran agreement has resulted in lower oil prices and Treasury yields, the persistent reduction in crude stocks and Strategic Petroleum Reserves remains a concern for inflation [1].
Leow recalls that peak market stress was observed in late March, as evidenced by a significant physical premium for crude oil at that time [1]. In recent weeks, market participants have grown more optimistic about the possibility of a US-Iran deal, which could allow energy traffic through the Strait of Hormuz to resume [1]. This optimism has contributed to easing immediate-term inflation concerns and has led investors to lower both oil prices and Treasury yields [1].
However, Leow warns that the ongoing drawdown in oil inventories could pose risks if market sentiment shifts and participants decide that oil prices should be much higher, even if the US-Iran conflict is resolved [1]. He further notes that even in a best-case scenario where energy traffic resumes, the process of rebuilding inventories across many countries will likely keep oil prices supported for some time [1].
CONCLUSION
DBS Group Research cautions that low oil inventories, especially in the US, may continue to support oil prices and global yields despite recent optimism about a US-Iran deal. The need to rebuild inventories could sustain price levels, keeping inflation concerns relevant for the foreseeable future.