Oil prices plunge 5%, has this round of oil crisis come to an end?

Does the decline in oil prices change the Federal Reserve’s expectations for interest rate cuts?

International oil prices have dropped by 5%, slightly easing market concerns about high oil prices. When oil prices are high, the U.S. Treasury Secretary publicly calms market sentiment, stating that the current oil supply gap does not pose a crisis and predicting that oil prices will fall well below $80 per barrel within a few months.

Behind the sharp decline in oil prices, besides the Treasury Secretary’s public statements, there are signs of easing related to the Strait of Hormuz blockage.

It is understood that ships have passed through the Strait of Hormuz for the first time in two weeks, which may be a good start. More ships may pass through the Strait in the future, leading to a gradual easing of global supply chain tensions.

Currently, the main factors influencing international oil prices are, on one hand, the ongoing tension in the Middle East, and on the other, the Strait of Hormuz blockage issue. Additionally, plans by major oil-producing countries to cut production also profoundly impact the global energy supply and demand structure, keeping international oil prices high.

When these three major factors begin to show substantial easing, the high oil price phenomenon will be effectively cooled down.

This round of conflict has lasted over 17 days, and the economic losses caused by the conflict far exceed market expectations. Under the influence of high oil prices, market concerns about a significant rise in global inflation pressures have increased, which in turn affects expectations for Fed rate cuts and the specific direction of global stock markets.

If the conflict continues, U.S. inflation data for the second and third quarters of this year could rise significantly, and the expectation of Fed rate cuts this year may be largely dashed. Once the dollar index strengthens again and the Fed’s rate cut cycle is invalidated, the flow of funds in global markets will change markedly, and stock markets may face significant adjustments.

Ultimately, whether oil prices will substantially cool down depends on when the conflict ends and when the Strait of Hormuz stops being blocked.

Under the influence of high oil prices, a series of aftereffects will gradually surface. For example, for the U.S. market, although energy prices do not have a high weight in the U.S. CPI, they tend to have a more indirect impact, which can be more significant than direct effects.

High oil prices will, to some extent, increase logistics costs, processing costs, raw material costs, and commodity prices in the U.S. If high oil prices persist for a longer period, their impact on U.S. inflation data will become more apparent. A significant rise in inflation data will influence expectations for Fed rate cuts and U.S. monetary and fiscal policies. It must be said that fluctuations in oil prices have an undeniable impact on the U.S. economy and even the global economy.

For the Chinese market, amid a sharp rise in international oil prices, domestic refined oil prices have increased by the largest single jump in nearly four years. Whether prices will continue to rise depends on future international oil price trends.

According to China’s domestic refined oil pricing mechanism, prices are adjusted every ten working days, with upper and lower limits set—essentially a ceiling and a floor. Specifically, when international oil prices exceed $130, domestic refined oil prices will either follow suit with a slight increase or not increase at all; if international oil prices fall below $40, domestic prices will not adjust accordingly. When international oil prices fluctuate between $40 and $130, domestic prices will fully follow international movements.

Based on recent international oil price performance, prices remain within the range where domestic refined oil prices are fully linked to international prices. If in the next adjustment window international oil prices stay above $90, the room for domestic price reductions will be very limited.

Oil price fluctuations affect many aspects of our daily lives and influence the direction of global capital markets. Compared to previous oil crises, this round involves more obvious human factors, and the outcome ultimately depends on negotiations. When negotiations succeed and the Strait of Hormuz is smoothly reopened, oil prices will return to a normal pricing trajectory.

Author’s note: Personal opinions only, for reference.