LONDON, September 10 — Brent crude touched $105 a barrel on Wednesday, a level last seen in 2023, and the move rippled straight into government bond markets. The 10-year US Treasury yield climbed above 4.5%, its highest since May 2024, while the policy-sensitive two-year yield rose to 4.9%. Yields rise as prices fall, which tells you the mechanics here: investors are selling bonds, not buying them, because they expect energy costs to keep inflation sticky and central banks to hold rates higher for longer.
Brent is the international benchmark for roughly two-thirds of the world’s crude, so its print is the number the rest of the market prices off. The climb to $105 is a long way from the roughly $75 a barrel seen in mid-2023, and it rests on two pillars — constrained supply and demand that has refused to crack.
The supply side
OPEC+ has kept production cuts of about 2 million barrels per day in place since late 2022, and in April 2024 extended them through the end of 2025. On top of that, attacks on shipping in the Red Sea by Houthi forces since late 2023 have added a risk premium that has nothing to do with barrels on the water and everything to do with the cost of moving them. Demand has not cooperated with the bears.
The International Energy Agency, in its June 2024 report, projected global oil demand growth of 960,000 barrels per day in 2024 and 1 million barrels per day in 2025, driven largely by non-OECD countries, China and India chief among them.
The inflation channel
Higher oil feeds into headline inflation directly, through petrol and energy bills, and indirectly, through transport and production costs. In the US, the national average gasoline price stood at $3.45 a gallon on Wednesday, according to AAA, up from $3.20 a month earlier. The Federal Reserve has held its benchmark rate in a range of 5.25% to 5.50% since July 2023 — the highest in 23 years — while core PCE, its preferred inflation gauge, ran at 2.6% year-over-year in May 2024, still above target.
The pressure is not confined to Washington. The European Central Bank cut its key deposit rate to 3.75% in June 2024, its first cut since 2019, and the Bank of England has held Bank Rate at 5.25% since August 2023.
Both now face a harder path. Equities took the hit. The S&P 500 fell 1.2% on Wednesday and the Dow Jones Industrial Average dropped 300 points, while the CBOE Volatility Index jumped 15% to 18.5.
Energy stocks were the rare bright spot, with the S&P 500 energy sector up 2%. The dollar strengthened too, with the US Dollar Index up 0.5% to 105.8.
That makes dollar-denominated oil more expensive for foreign buyers — a dynamic that could dampen demand and eventually ease price pressures, but in the short term it worsens inflation in emerging markets.
What to watch
The last time Brent traded above $105 was in August 2023, when it briefly touched $105.50 before retreating. This move is different in one respect: it comes as Chinese growth is slowing, with GDP up 5.3% year-over-year in the first quarter of 2024 against 5.2% in the previous quarter. Yet Chinese oil imports averaged 11.3 million barrels per day in the first five months of 2024, up 2% on the same period in 2023.
Central banks are boxed in. Raise further and you risk recession; hold and inflation may entrench.
Markets price a 30% chance of a Fed hike at the July 30-31 FOMC meeting, according to CME Group’s FedWatch tool. The June US jobs report, due July 5, and the CPI release on July 11 will shape that bet. The IMF has warned that a sustained $10 rise in oil prices could shave 0.2 percentage points off global GDP growth and add 0.4 percentage points to global inflation.
Importers such as India and Japan watch their trade deficits widen; exporters such as Saudi Arabia and Russia collect a windfall. Whether this dual shock lasts depends on two things — whether oil stays elevated, and whether bond markets steady.
