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ECB monetary policy meeting highlights oil and energy shocks' market impact

The ECB said Brent briefly fell to pre-war levels after a preliminary peace agreement, while longer-dated oil futures stayed elevated and oil-driven inflation expectations rebounded faster than short-term volatility measures.

Reported · Written up by our desk · Central Banks

Action Forex reports that ECB Governing Council member Ms. Schnabel opened the monetary policy account by saying financial markets had been shaped since the 10-11 June meeting by the evolving Middle East conflict and AI-related developments. She added that oil prices remained highly sensitive to geopolitical developments and that disruptions to global energy supply chains persisted, even as vessel traffic through the Strait of Hormuz had risen temporarily before declining again.

She noted that Brent crude had briefly dropped back to pre-war levels after news of a preliminary peace agreement, but current prices were still below recent peaks and below levels seen just ahead of the June meeting. At the same time, longer-dated oil futures prices stayed elevated throughout the short-term volatility, with the futures curve down versus June but still well above pre-war levels across the horizon, suggesting upside risks to oil prices.

The ECB described a partial decoupling between financial market developments and short-term oil swings. When oil moved sharply lower, the one-year overnight index swap rate one year ahead adjusted more modestly, reflecting limited inflation-compensation response, but interest-rate expectations rose quickly after oil rebounded, surpassing June levels.

Ms. Schnabel also tied the dynamics to how oil had not represented broader energy market conditions. Action Forex reports the ECB cited crack spreads reaching new all-time highs, driven by tight inventories and constrained refining capacity from the destruction of refining facilities in the Middle East and in Russia, plus natural gas prices remaining well above pre-war levels.

Latest closeWTI crude $81.58 ▼0.9%|Brent $86.32 ▼2.5%|Nat gas $2.918 ▲5.3%

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