The initial relief over the US Treasury’s Office of Foreign Assets Control issuing a general license allowing the sale, delivery, unloading, and import of Russian diesel, including into the US, through April 7, 2027, has faded: oil prices surge to five-month highs as the Middle East crisis shows no sign of ending.
On Monday, the Houthis claimed attacks on Saudi energy facilities, military sites, and airports. Later, they struck a training camp for Yemeni government security forces, while Iran warned Egypt that further involvement in the Saudi-Houthi conflict would worsen the situation and threaten regional security.
Thus, investors are worried about potential supply disruptions via Saudi Arabia and the Strait of Hormuz. US inventories may also be supporting prices, with the Strategic Petroleum Reserve down to 283 million barrels, its lowest level since October 1982 and less than 40% full.
Shrinking reserves leave Washington with less room to respond to further supply disruptions, raising the risk of higher oil prices. They could also keep prices elevated even after the conflict ends.
When could tensions ease?
If anything, tensions between Tehran and Washington could escalate further once the US midterms are out of the way. Hence, Goldman Sachs doesn’t seem particularly optimistic either, raising its December 2026 Brent forecast to $90 per barrel from $85.
The bank still expects prices to average $80 in 2027 as Gulf exports recover, but that outlook could change quickly depending on how events unfold.
In the meantime, the uncertainty could keep inflation higher for longer, leaving central banks, including the Fed, with less room to cut rates.
By the way, US producer prices coming in well above expectations in September, rising 1.3% month over month and 6.3% year over year, has already pushed the probability of a December rate hike above 70%, with two more hikes expected next year.
More hawkish central banks could put further pressure on bond markets as yields rise, potentially pushing investors away from riskier assets like the S&P 500 and Nasdaq. Add the risk of an AI slowdown, and bears might have a case for a stock market crash next year.
That’s just one view, of course, but clouds may indeed be gathering over equities.