Markets Navigate Between Oil Squeeze and Interest Rate Corridors
Global markets have entered a new phase of dual testing. While attention is focused on the U.S. Federal Reserve’s decision today, Wednesday, and its implications for interest rates, the dollar, equities, and gold, oil continues its upward trajectory, driven by escalating tensions in the Middle East and growing concerns over disruptions to supply flows through the world’s most critical maritime chokepoints.
Oil prices surged by more than 1.5%, with Brent crude heading toward $107.31 per barrel, while West Texas Intermediate (WTI) rose to $103.14 per barrel, amid fears of a widening conflict and the difficulty of containing its impact on trade and energy flows.
Concerns are no longer limited to crude prices alone; the shipping routes themselves have become a key risk-pricing factor. Cargo ship traffic through the Strait of Hormuz dropped to fewer than 10 voyages per day at the start of the week, while preliminary data showed only four vessels transiting the strait on Monday, compared with ten the previous day.
This comes as oil shipping costs are rising at unprecedented levels. The daily charter rate for a very large crude carrier (VLCC) on one of the key routes exceeded $1 million for the first time, reaching approximately $1.03 million per day for the route from the Gulf to China—a direct reflection of the scarcity of vessels willing to risk entering the Gulf region.
Hormuz and Bab el-Mandeb: A crisis beyond oil, with the risk circle expanding
From Hormuz to Bab el-Mandeb, vessel traffic has also declined in the latter strait. The simultaneous disruption of both chokepoints means markets are facing not just higher crude prices, but also increased shipping and insurance costs, along with the potential for supply chain disruptions.
The situation is further complicated by Gulf states postponing scheduled talks with Iran regarding the Strait of Hormuz, reinforcing fears that tensions may persist for a longer period.
In Saudi Arabia, an attack on the East-West pipeline led to its precautionary shutdown, adding another layer of risk to the supply landscape. This follows oil gains of nearly 8% last week, pushing prices above the $100 mark for the first time since July.
The Fed faces a difficult equation
In Washington, oil has become one of the variables complicating the Fed’s task. Crude prices above $100 threaten to reignite inflationary pressures, even as recent U.S. data show a strong labor market and accelerating consumer prices.
This quickly reflected in the bond market, where the yield on 10-year U.S. Treasuries surpassed 5.02%, the highest level since 2007. The 2-year yield reached 4.67%, and the 30-year yield hit 5.37%.
Thus, markets face a highly sensitive equation: higher oil means higher inflation; higher inflation means tighter monetary policy; and tighter policy means greater pressure on equities, gold, and emerging and Gulf markets.
Gold: A safe haven under yield pressure
Gold faced pressure ahead of the Fed’s decision, with futures contracts falling about 0.5% to $4,330.80 per ounce, and spot prices dropping 0.2% to $4,287.99.
The precious metal is caught in a tug-of-war between two opposing forces: on one hand, geopolitical tensions and rising inflation risks provide support as a safe haven; on the other, high bond yields and the prospect of monetary tightening weigh on it, given that gold is a non-yielding asset.
Therefore, the Fed’s decision alone will not be the sole focus for investors; the central bank’s language in explaining the decision and the future path of monetary policy will also be closely watched.
The Gulf faces a dual test
Gulf markets enter the post-Fed session carrying oil gains as a support for revenues and financial flows, but they simultaneously face higher funding costs and tighter global monetary conditions.
Consequently, while oil remaining above $100 may provide financial support to regional economies, it does not negate the impact of higher U.S. yields on equity valuations, liquidity, and borrowing costs.
In sum, markets are now navigating between oil corridors and interest rate corridors: Hormuz and Bab el-Mandeb determine the level of geopolitical risk and the cost of energy and shipping, while the Fed determines the cost of capital and the direction of global liquidity.
Kuwait: Oil high, stock market under test
In Kuwait, the global backdrop was reflected in market performance. The Kuwait Stock Exchange closed with its general index down 16.25 points, or 0.18%, to 8,945.99 points, amid elevated liquidity of approximately 130.4 million dinars across 31,900 trades.
In detail, the First Market index fell 0.24%, while the Main Market index rose 0.07%, and the Main 50 index climbed about 0.58%.
The movement of the indices reveals a divergence between blue-chip stocks and operational stocks, as investment portfolios monitor the impact of higher oil prices on one hand, and the repercussions of rising interest rates and U.S. yields on the other.
In the local oil market, the price of Kuwaiti crude rose by $4.39 to $123.41 per barrel in Monday’s trading, compared with $119.02 in the previous session.
Kuwait also raised its official selling price for export crude destined for Asia in October to a discount of $2.75 per barrel from the average of Oman and Dubai benchmarks, signaling pricing shifts in the Asian market.
Oil in numbers
- Brent: $107.31
- WTI: $103.14
- Kuwaiti crude: $123.41
- Oil gains last week: approximately 8%
- Brent approaching $110
Hormuz: A lifeline under pressure
- Vessel traffic: fewer than 10 voyages per day
- Latest data: 4 vessels transited on Monday
- Pre-war: approximately 125 large commercial vessels per day
- More than 12 million barrels passed through Hormuz in a single day, according to U.S. statements
- VLCC charter cost on one route: over $1 million per day
Bonds say inflation is not over!
- 10-year yield: 5.02%
- 2-year yield: 4.67%
- 30-year yield: 5.37%
- 10-year level: highest since 2007
Gold between safe haven and interest rates
- Futures: $4,330.80
- Today’s decline: 0.5%
- Spot price: $4,287.99
- Main pressure: rising yields and monetary tightening risks
- Support: geopolitical tensions and inflation risks
Kuwait Stock Exchange
- General index: 8,945.99 points
- Change: -16.25 points / -0.18%
- Liquidity: 130.4 million dinars
- First Market: -0.24%
- Main Market: +0.07%
- Main 50: +0.58%
