Learning to Live with Higher Oil?

The market is learning to live with higher oil prices, as evidenced by gains on the major US indices on Tuesday. However, the big question is, for how long? Right now, solid earnings are coming to the rescue and are helping divert market focus away from the fact that oil prices are advancing. While we are not yet back to triple-digit oil, it can’t be ruled out should a ceasefire of any sort remain hard to come by. The energy market now has the dual-Strait worry, with the Bab el-Mandeb Strait looking like it could join the Strait of Hormuz as a hot spot, as traders closely watch shipping numbers in the Red Sea. Brent has moved through the $90 level, and while risk assets are putting on a brave face despite the higher energy prices, if we get to the psychological $100 oil level that could be another thing altogether.

Higher oil and a lift in Treasury yields helped push the Dollar Index back above the 101 level this week. The yen continues to wallow in the absence of any intervention by Japanese monetary authorities, while the British Pound is burdened by the prospect of boosted fiscal expenditures under the new PM Andy Burnham. While the Fed are unlikely to hike rates at next week’s FOMC meeting, a hike is still likely on the way, perhaps in September or December (according to interest rate futures pricing) and this yield outlook remains supportive of the greenback.

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Gold managed to shrug off the combination of a higher USD and higher oil to reclaim the $4,100 level. However, a ceasefire or diplomatic breakthrough may be required in order to lower oil prices and open up more meaningful upside for the precious metal. Recent price dips below $4,000 have found bargain-hunting buyers which have provided a floor of sorts, but a conclusive or convincing break higher remains elusive. Support awaits at $4,020 and $3,970, with near-term resistance at $4,140.