Oil’s march toward $100, bond yields climb as inflation fears rattle futures markets

Brent crude futures pushed toward $100 a barrel in Asia and European trading, compounding inflation anxiety that sent bond yields higher and dragged U.S. stock futures lower. S&P 500 futures fell 0.3% in early trade, while Nasdaq futures turned fractionally negative after an initial gain. European stocks retreated, with the Stoxx 600 down 0.7%, and Asian benchmarks struggled for direction.

The latest leg higher in oil prices followed new attacks on Saudi infrastructure by Yemen’s Iranian-backed Houthi rebels, and continued tit-for-tat strikes between the U.S. and Iran. Brent traded at $99 a barrel after Saudi Arabia said operations at facilities in the kingdom’s south were halted by attacks, according to a report. Shanghai crude, which reflects Chinese demand, climbed above $102 a barrel, indicating a sharp reversal in the world’s largest oil importer’s buying patterns.

Chinese demand surge adds to market tightness

Chinese oil imports, which had slumped for much of the year, have rebounded aggressively in recent weeks. Shanghai crude now trades at a premium to Brent — a sharp reversal from a $20 discount in late April — signaling that the period of weak Chinese demand is over. Traders told Bloomberg that Chinese buyers are chasing cargoes from Africa, Canada, Brazil and Argentina as disruptions through the Strait of Hormuz and limited Iranian supplies intensify competition for alternatives. Congo’s Djeno crude was offered to Chinese buyers at premiums as high as $20 a barrel over ICE Brent, up from about $15 a few weeks ago, according to traders.

The buying spree is putting pressure on smaller Chinese refineries that once relied on heavily discounted Iranian barrels, which are now largely cut off by the U.S. blockade. Goldman Sachs energy expert Daan Struyven warned that Brent could rally to as much as $120 a barrel if attacks on shipping in the Middle East increase, as reported by Bloomberg. Goldman recommended hedging geopolitical risk through long positions in natural gas and refined products rather than crude, citing larger supply shocks in those markets.

Refined-product crunch compounds the strain

The global squeeze on diesel and other refined fuels is adding to inflationary pressures. Vitol CEO Russell Hardy, speaking at an industry conference in Singapore, described the refined-product market as “pretty tight and inflexible.” Hardy said global oil-product stockpiles are “still drawing” and that “we’re still not running enough refining capacity to prevent those draws.” The U.S. diesel crack spread remained above $101 a barrel, and U.S. distillate inventories, including diesel, are at their lowest seasonal level in at least 25 years despite high refinery utilization. Phillips 66 senior vice president Mark Senn warned that the U.S. system is running at full capacity with “very little flex.”

Bond yields rise, rate-hike odds firm

The jump in oil prices has reinforced bets that central banks will need to keep raising rates. Traders put the implied probability of a quarter-point rate hike at the Federal Reserve’s Sept. 15-16 meeting at roughly 60% to 64%, according to multiple market measures, including the CME Group’s FedWatch tool. The 30-year U.S. Treasury yield traded at 5.28%, near a 19-year high, and the 10-year yield edged up to 4.788%. The yield on the two-year note also rose.

The European Central Bank is expected to hike its deposit rate by a quarter point to 2.50% at its meeting Thursday, a move largely priced in. The Bank of Japan is also seen moving toward tighter policy as the yen strengthened. The yen jumped as much as 0.6% to 153.51, its strongest level since February 18, supported by stronger-than-expected Japanese wage growth data and growing expectations of a BOJ rate increase.

Friday’s CPI becomes swing factor

The week’s focal point is Friday’s U.S. consumer price index report. Fed officials have made clear that the inflation print will be decisive for the September rate decision, and the bond market sees a 60% chance of a hike next week, according to one report. While economic data took a back seat on Tuesday, the August jobs report last Friday — which showed payrolls rising 162,000, above estimates — had already pushed hike odds higher.

“Markets will be adjusting their positioning heading into the Fed’s blackout period. The risk is the Fed turning hawkish and that will be reflected in equities,” Geoff Yu, a senior macro strategist at BNY, said in a note cited in a report. “Bond markets will remain nervy and we remain focused on fixed-income volatility.”

Corporate bright spots and pitfalls

Dell Technologies jumped as much as 8% in premarket trading after boosting its annual sales forecast by $25 billion on surging demand for servers to run artificial intelligence tasks. Snowflake surged 24% after beating quarterly estimates and raising its product revenue forecast. GitLab rallied as much as 21% after raising full-year guidance.

On the downside, Novartis shares fell after its heart drug pelacarsen failed in a final-stage study, the third drug setback in a week for the Swiss drugmaker. Ultragenyx Pharmaceutical plunged 44% after an experimental drug missed its primary endpoint. The broader market remained cautious, with JPMorgan analysts turning neutral on equities this week, saying stocks will continue to struggle until crude and rates stabilize.