Deutsche Bank’s Henry Allen and colleagues highlight that Brent Oil has reversed earlier gains as reports of a conditional ceasefire between Israel and Lebanon eased some geopolitical risk. However, they stress that the Strait of Hormuz remains blocked and Polymarket odds show rising scepticism about a quick return to normal traffic, keeping longer-dated Brent futures elevated and inflation concerns alive.

Geopolitics keep Brent risk premium

"The geopolitical headlines have become slightly more positive this morning, with oil prices falling back after the US said that Israel and Lebanon agreed to a ceasefire. That ceasefire is conditional on Hezbollah also stopping fighting, but in theory, the news helps to take out a key sticking point in the US-Iran talks that was holding up a deal."

"So that’s seen oil prices reverse a run of three consecutive gains, with Brent crude down -0.96% to $96.87/bbl. And given the news, the 10yr Treasury yield (-1.4bps) has also fallen back to 4.48%."

"Before that, markets had already struggled yesterday, as growing doubt about a US-Iran peace deal pushed Brent crude (+1.89%) up for a third consecutive session, closing at $97.81/bbl. And with the Strait of Hormuz still blocked and no clear sign of a resolution, there were even mounting expectations about a potential Fed rate hike this year, with market pricing for that up to 81% by the close."

"And it was clear investors were pricing the longer conflict scenarios as well, with the 6-month Brent crude future (+1.07%) up to $86.91/bbl."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)