Weekly Buzz: Oil comes off the boil as the US and Iran reach a deal

Over the weekend, the US and Iran announced an agreement to wind down their conflict. The deal would extend their ceasefire by another 60 days and reopen the Strait of Hormuz. The channel, which carries about a fifth of the world's seaborne oil, had been effectively closed since the end of February.

What’s going on here?

With tankers set to move again, Brent crude fell around 5% on Monday and slid through the week, dropping below $80 a barrel for the first time since March. The blockade is what pushed prices up, so the prospect of supply returning is what pulls them back down. The text is due to be signed formally on Friday in Switzerland. Israel has kept its distance from the agreement, and tensions in Lebanon remain a risk for the region.

For investors, it's worth looking at how the past few months have played out for markets. Oil rose, and so did inflation, with US consumer prices hitting 4.2% in May. Brent climbed above $100 for the first time since 2022 and peaked near $120.

Several factors worked against a bigger spike in oil prices. For one, the market was already well stocked going in, with OPEC+ steadily adding barrels and the International Energy Agency releasing a record 400 million barrels from strategic reserves, more than double what it put out during the Russia-Ukraine conflict in 2022.

What’s the takeaway?

Where oil goes next depends on how the deal develops and how quickly supply returns. Markets work on a balance of many forces. A supply shock, a change in policy, or a shift in global buying and selling can all pull in different directions at once, which is why outcomes rarely match the headlines. Diversifying across regions and asset classes doesn't remove that uncertainty entirely, but it does leave you with a more resilient portfolio.

(For a portfolio that’s designed to weather different scenarios, see General Investing.)

In Other News: A big week for the big banks

It was a big week for central banks, with the Federal Reserve (Fed), Bank of England (BoE), and Bank of Japan (BoJ) all announcing their decisions on interest rates. Most of the focus, though, was on the Fed. The US central bank held rates steady for a fourth straight meeting, keeping its policy rate at 3.5% to 3.75%.

Wednesday's decision was the first led by its new chair, Kevin Warsh. Some analysts read the news as hawkish: that Warsh is content to keep rates higher for longer. Other analysts saw dovish signals, given he was picked by a president pushing openly for lower borrowing costs. His debut leaned hawkish, and markets took the Fed's latest projections, along with Warsh's tone, as a signal that a rate hike could arrive by October.

What the Fed actually does will depend on the data, and the latest data didn't quite make the case for cuts. US employers added 172,000 jobs in May, roughly double what economists expected, with March and April both revised higher. Consumer prices, meanwhile, rose 4.2% over the year to May, the fastest pace in more than three years and more than double the Fed's 2% target.

Much of the jump came from energy. Strip out food and fuel, and core inflation rose 2.9%, below forecasts. So the headline reads hot, but the pressure looks narrow, driven by oil. What happens next depends on what economists call second-round effects. The risk is that the spike in energy prices leaks elsewhere in the economy, potentially turning a temporary increase into lasting inflation. So far, wages aren't following oil prices higher, which is what the Fed is likely looking out for.

These articles were written in collaboration with Finimize.