The outbreak of war with Iran has significantly increased the risk premium for global crude oil, with supply concerns related to the Strait of Hormuz being the main driver of rising oil prices. Higher oil prices have strengthened inflation stickiness, increased market repricing of the Federal Reserve's policy path, and put pressure on assets such as non-interest-bearing gold. Recently, Brent crude oil briefly fell below $90 as peace expectations rose, but then quickly rebounded above $95 due to Trump's explicit statement that "the US does not need a deal with Iran," related attacks, and disruptions to passage through the Strait. This dramatic fluctuation in oil prices directly reflects the market's high sensitivity to the outcome of the war.

Short-term drivers: The dominant role of oil prices in war pricing

In the short term, the impact of oil prices on precious metals and even broader macroeconomic assets has exceeded mere expectations of Federal Reserve policy. The war driving up oil prices itself constitutes a suppressive mechanism for gold: rising energy prices strengthen inflation expectations, raise real interest rate pricing, and weaken the relative attractiveness of non-interest-bearing assets. Conversely, once there are credible signs of the war ending, a drop in oil prices will directly alleviate inflationary pressures, reduce the necessity for further significant tightening, and thus change the relative performance environment of precious metals. Even if the Federal Reserve continues to raise interest rates, the buffering effect of falling oil prices may still allow precious metals to partially recover the gains lost due to the war. The market has largely priced in the Federal Reserve completely reversing the 2025 rate-cutting cycle and implementing approximately three additional rate hikes until mid-2027. Some observers believe this has shaken the foundation of the devaluation trade. However, actual market activity shows that the marginal changes in Federal Reserve policy expectations have a relatively limited short-term impact on gold—when the market recently priced in an additional 25 basis point rate hike expectation in a short period, gold fell by about 2.6%. In contrast, oil prices react far more dramatically to war-related news, directly impacting the relative pricing of safe-haven and risk assets. The political sphere also provides crucial clues. Vice President Vance explicitly stated after the midterm elections that the war was a significant reason for the Republican Party's poor performance. Political pressure makes the eventual conclusion of the war highly certain, but the specific timing and manner remain highly uncertain. This uncertainty itself is a key reason why the current risk premium for crude oil has been maintained. The actual passage through the Strait of Hormuz, the frequency of attacks, and Iran's stance on the nuclear issue continue to influence market assessments of the speed of supply recovery.

Medium-term logic: The trajectory of US fiscal policy remains the underlying support.

Leaving aside short-term fluctuations, the fundamental logic behind currency devaluation trading remains unchanged. The market's continued concern is that the US will address its debt burden through inflation rather than fiscal consolidation. Currently, outside of a crisis, US debt issuance is still equivalent to approximately 6.5% of GDP, a phenomenon that has hardly become a real focus of policy discussion in Washington. Following the Fed meeting on July 29th, the US Treasury yield curve experienced a sharp bear market steepening, which the market interpreted as a resurgence of concerns about policy credibility. A congressional figure privately stated, "We need a crisis to truly drive fiscal repair." This statement reflects the medium-term direction: fiscal pressure continues to accumulate, which in itself supports the logic of currency devaluation. Oil prices play a dual role in this process. High oil prices during wartime exacerbate the fiscal burden—higher energy-related spending, potential subsidy needs, and an overall inflationary environment all push up debt interest costs. Conversely, the decline in oil prices after the war may temporarily alleviate inflationary pressures, giving the Fed more room to maneuver and further delaying genuine fiscal consolidation. In either scenario, the medium-term deterioration trend of the US debt trajectory is difficult to reverse.

The core dimensions to observe in the current crude oil market

In summary, crude oil pricing is currently caught between short-term geopolitical risks and medium-term macroeconomic fiscal logic. In the short term, supply disruptions related to the Strait of Hormuz and the pace of the war's end remain the most direct sources of oil price volatility. Any news about attacks, obstructions, or progress in negotiations will quickly repric the risk premium. In the medium term, the US's continuously expanding fiscal deficit and the Federal Reserve's policy credibility issues provide the underlying framework for broader asset pricing. The periodic divergence between oil and gold prices essentially reflects the relative strength of these two forces at different time scales. For market participants focused on crude oil, understanding how oil prices influence the Fed's expectations through inflation, reflect geopolitical processes through supply risks, and link with US fiscal sustainability is more valuable than simply tracking a single price point. How the war ultimately ends, how oil prices complete the premium-free process, and how fiscal pressure manifests over a longer time horizon will collectively determine the pricing path of crude oil and related macroeconomic assets in the future.