RPT - MNI INTERVIEW: Oil Over Pre-War Levels Till H2 27

Oil prices are unlikely to return to pre-war levels until late summer 2027, despite a preliiminary agreement between the U.S. and Iran allowing the reopening of the Strait of Hormuz, with little prospect of a rapid decline, senior European Commission energy analyst Manuel Rivas told MNI on Monday.

Following the announcement of the deal, prices could ease slightly from the levels seen last week, when markets increasingly anticipated an agreement, but they may rise again once investors fully appreciate how long the recovery process will take, Rivas said in a phone interview, adding that prices would remain relatively elevated well beyond 2027.

It will take many months for Persian Gulf producers to restore output fully, though around 80% of production should be back online within three to four months, he said. The recovery will also be slowed by countries seeking to rebuild strategic stockpiles, as geopolitical instability becomes a more persistent feature and given concerns that the resolution to the current conflict could prove only temporary.

Rivas described the energy shock as more severe than the 1970s version, though its impact on prices and supply has been less dramatic because the market entered the crisis from an unusually favourable starting position.

"Very high levels of stocks, absorption, more production in the U.S. and Brazil had helped to reduce the deficit to only six or seven million of barrels per day. We had plenty of buffer. Oil and gas markets were more resilient than what we thought," he said, adding that the market was only one or two weeks away from a dramatic price spike had the agreement not materialised, though expectations of a deal helped keep prices contained. (See MNI INTERVIEW: Oil Shock Means Europe Needs Higher Rates)

Rivas expects the crisis to accelerate electrification, particularly in Europe and in the automotive sector, much as the experience of the 1970s encouraged a shift towards smaller and more fuel-efficient vehicles.

The Strait of Hormuz will remain a key chokepoint for global energy flows, though new pipelines could reduce its importance by half within three years, he said.

"Between the pipe to cross the Gulf of Oman, the one that goes through Syria into the Mediterranean and the projects to arrive to the Red Sea, Hormuz won't produce a global deficit of six or seven million and would be on the region of three or four instead. Additionally, oil demand won't increase but will be stable until 2030-2035,” he said.

EUROPE BETTER PREPARED

The European Union can be relatively satisfied with the way it has weathered the crisis, as it demonstrated that the bloc learned important lessons from the 2022 energy shock triggered by Russia's invasion of Ukraine, Rivas said.

While gas prices rose sharply, the impact on household energy bills was significantly more contained than the roughly 50% increase seen in benchmark TTF prices.

Oil prices have a more direct impact on inflation through transport costs, but the effect of higher gas prices was limited by the substantial expansion of renewable energy since 2022, which reduced the influence of gas on electricity prices, Rivas said. This was particularly evident in countries such as Spain and France, which are less dependent on gas than Italy and Germany.

To continue reducing electricity costs, Europe is prioritising battery deployment to store renewable energy generated during the middle of the day, when power prices frequently turn negative, and to release it during evening peak demand hours, Rivas said.

MNI INTERVIEW: Oil Over Pre-War Levels Till H2 27 Despite Deal

Oil prices are unlikely to return to pre-war levels until late summer 2027, despite a preliiminary agreement between the U.S. and Iran allowing the reopening of the Strait of Hormuz, with little prospect of a rapid decline, senior European Commission energy analyst Manuel Rivas told MNI on Monday.

Following the announcement of the deal, prices could ease slightly from the levels seen last week, when markets increasingly anticipated an agreement, but they may rise again once investors fully appreciate how long the recovery process will take, Rivas said in a phone interview, adding that prices would remain relatively elevated well beyond 2027.

It will take many months for Persian Gulf producers to restore output fully, though around 80% of production should be back online within three to four months, he said. The recovery will also be slowed by countries seeking to rebuild strategic stockpiles, as geopolitical instability becomes a more persistent feature and given concerns that the resolution to the current conflict could prove only temporary.

Rivas described the energy shock as more severe than the 1970s version, though its impact on prices and supply has been less dramatic because the market entered the crisis from an unusually favourable starting position.

"Very high levels of stocks, absorption, more production in the U.S. and Brazil had helped to reduce the deficit to only six or seven million of barrels per day. We had plenty of buffer. Oil and gas markets were more resilient than what we thought," he said, adding that the market was only one or two weeks away from a dramatic price spike had the agreement not materialised, though expectations of a deal helped keep prices contained. (See MNI INTERVIEW: Oil Shock Means Europe Needs Higher Rates)

Rivas expects the crisis to accelerate electrification, particularly in Europe and in the automotive sector, much as the experience of the 1970s encouraged a shift towards smaller and more fuel-efficient vehicles.

The Strait of Hormuz will remain a key chokepoint for global energy flows, though new pipelines could reduce its importance by half within three years, he said.

"Between the pipe to cross the Gulf of Oman, the one that goes through Syria into the Mediterranean and the projects to arrive to the Red Sea, Hormuz won't produce a global deficit of six or seven million and would be on the region of three or four instead. Additionally, oil demand won't increase but will be stable until 2030-2035,” he said.

EUROPE BETTER PREPARED

The European Union can be relatively satisfied with the way it has weathered the crisis, as it demonstrated that the bloc learned important lessons from the 2022 energy shock triggered by Russia's invasion of Ukraine, Rivas said.

While gas prices rose sharply, the impact on household energy bills was significantly more contained than the roughly 50% increase seen in benchmark TTF prices.

Oil prices have a more direct impact on inflation through transport costs, but the effect of higher gas prices was limited by the substantial expansion of renewable energy since 2022, which reduced the influence of gas on electricity prices, Rivas said. This was particularly evident in countries such as Spain and France, which are less dependent on gas than Italy and Germany.

To continue reducing electricity costs, Europe is prioritising battery deployment to store renewable energy generated during the middle of the day, when power prices frequently turn negative, and to release it during evening peak demand hours, Rivas said.

MNI INTERVIEW:US-Canada Deal Must Drop 232 Tariffs-Steelmakers

Prime Minister Mark Carney must avoid signing a trade deal that keeps U.S. national security tariffs while President Donald Trump should drop 50% steel levies because they boost costs without tackling overcapacity in places like China, the head of Canada's steelmaking association said.

“The way out from our perspective is Canada cannot sign a bad deal, and a bad deal for us would be if the 232 tariff regime isn’t resolved,” Catherine Cobden, president of the Canadian Steel Producers Association, said Thursday after parliamentary testimony. The 232 tariffs have also been imposed on Canada's aluminum and auto makers. 

Both national leaders says it's unlikely a July 1 deadline to renew the USMCA pact will be met and Trump said that's better because that move triggers annual reviews over the next decade. Carney has not publicly pushed for a fast deal saying most exporters still deliver tariff free, and at times he's suggested the U.S. is determined that some tariffs remain.

“We can’t let our 232 sectors down, we’re very significant across the economy, it’s not just steel as you know it’s aluminum, it’s autos,” Cobden said. Canadian steel exports to the U.S. have fallen by more than half since the new tariffs, forcing layoffs and canceled investments, she said. (See: MNI INTERVIEW: BOC Holds With Broader US Tariff-Senator Gignac)

NO FATHOMABLE WAY

U.S. tariffs are hurting its own economy, not just Canada's, Cobden said, citing a 40% rise in American prices for hot rolled coil steel. Canada was the largest shipper of steel to the United States, filling in some of the 26 million tons a year America imported.

"There’s no fathomable way that they can build 26 million tons of steel in a year, even five years or ten years,” Cobden said. 

“What we therefore see is a significant escalation of pricing in the United States, which is not happening in Canada,” she said. “That’s the side of the story you don’t hear too often in the United States.”

The U.S., Canada and Mexico are better off cooperating to tackle global overcapacity, Cobden said, something the trade war is preventing. “My hope is that’s the long game, we will get back to that and once again find our way back to North American countries fighting against a formidable challenge in steel overcapacity.”

Carney told reporters Thursday “we are going to get a deal that’s right for Canadians,” and “there’s tremendous advantage to keep integration in certain sectors.” These include steel, aluminum, autos, and forestry, he said, “but we’ve got work to do to convince the U.S. side of that.”

MNI INTERVIEW: Fed Seen Pulling Guidance On Rates - English

Federal Reserve policymakers are likely to remove interest rate guidance from their policy statement next week, and new Chair Kevin Warsh could announce reviews of the central bank's communications and the balance sheet, former director of the Fed Board's division of monetary affairs William English told MNI.

"I think there's agreement on the committee, more or less, at this point that they don't want to provide any particular direction for policy. So I think that sentence probably goes," he said about the Fed's rate guidance in the FOMC post-meeting statement. 

At the April meeting, officials were split on whether to remove the easing bias that described that the Fed will consider the "extent and timing of additional adjustments to the target range of the federal funds rate." Three Fed officials in April dissented over the inclusion of an easing bias in the statement. 

Warsh and the FOMC may see interests overlap, English said. "I think he's in the happy situation where he's been saying for kind of philosophical reasons he doesn't want to provide any guidance. I'm not sure the committee agrees with him on that, but at the moment in this particular situation they don't have any guidance to give."

"They'll provide no guidance on where rates might go up or down from here and and that will work for everybody, at least in the near term," said English, a former secretary to the Federal Open Market Committee and now at Yale University.

REVIEWS

The June FOMC meeting may mark the beginning of bigger picture projects initiated by the new chair, English said. (See: MNI INTERVIEW: Warsh Could Overhaul SEP, Drop Dot Plot - Lewis) 

"It's likely the new Federal Reserve chair will announce a new look at the central bank's communications," he said. The FOMC considered changes to its communications policies last year under Chair Jay Powell. Warsh "may well say at the press conference that they're going to initiate work on" the balance sheet as well.

"I do think we'll hear about what what are his intentions on moving these ideas forward," he said. 

English suggested Warsh may not submit his rate forecast or any forecast at all for the SEP, noting that then-Chair Alan Greenspan didn't provide forecasts for the Monetary Policy Report. "That wouldn't be without precedent," he said. (See: MNI POLICY: Warsh Could Reshape Fed On Rates, Communication)

SCENARIOS

The Fed should take a wait-and-see approach toward the recent increase of inflation, English said. He can see a rate cut or hikes over time.

"The underlying strength in demand, employment, and so on has been a little greater than I maybe expected. The economy seems to be on pretty solid footing. On the other hand, the inflation news is not so great but it depends a great deal on what happens in terms of some sort of agreement in the Gulf and we just don't know what's going to happen."

MNI INTERVIEW: Warsh Could Overhaul SEP, Drop Dot Plot - Lewis

New Federal Reserve Chair Kevin Warsh is likely to launch a broad review of the Fed's communications framework -- potentially as early as next week -- that could culminate in significant changes including the elimination of the closely-watched dot plot of interest rate projections, Kurt Lewis, who served as a special adviser to outgoing chair Jerome Powell from 2023 to early 2026, told MNI. 

Warsh has discretion to push through substantial changes to Fed communications, and the committee would likely follow his lead, Lewis said in an interview. 

"I'm of the opinion that they're going to do a pretty significant review of what's gone on in terms of communications, including perhaps massive changes to the Summary of Economic Projections that could include dropping the dot plot," said Lewis, now head of central bank policy at Piper Sandler. (See: MNI INTERVIEW: Warsh Set To Dial Back Fed Guidance - Swanson)

Introduced in 2012, the dot plot shows where each Fed policymaker expects interest rates to be three years into the future, and a revised median projection is capable of moving markets. Internally, it has long been a subject of criticism, with some officials arguing that investors treat it as a firm commitment rather than a conditional forecast.  

Ahead of its launch, five of 17 FOMC members -- Elizabeth Duke, Jeffrey Lacker, Richard Fisher, Charles Plosser and Narayana Kocherlakota -- voiced opposition or caution regarding its publication, according to a transcript of the December 2011 FOMC meeting. 

"Having been on the inside, I know that there is a level of frustration with how things are interpreted, and at some point, you have to make the cost-benefit analysis on signal or noise," Lewis said.  

"Do people take this too literally as a commitment, instead of recognizing that it's just a forecast? Will it box people in, in terms of will they feel like it's tough for them to do something that was counter to the last dot that they put out? Those were all things that people raised in late 2011 and are still some of the main questions today."   

EVERYTHING ON THE TABLE

An overhaul of the inflation target or the Fed's monetary policy implementation framework and balance sheet would require votes and significant work across the FOMC, but Warsh would not need unanimity to enact change in Fed communications, Lewis said. 

The communications framework is an area where chairs have historically commanded more deference from the committee than on policy questions. "They understand his communications challenge is greater, and they want to support as clear communication as possible," he said.

The review could follow a similar path as in 2011, with a subcommittee of governors and regional bank presidents taking a holistic look at all communications practices over the better part of a year. 

"If they do a full communications review, everything will go back on the table," he said.   

The dot plot may be replaced with some other forecast, such as the staff's, an idea floated by Ben Bernanke in his communications review, but some of the same issues would arise, Lewis said. Markets might simply fixate on a staff projection in the same way they currently hang on policymakers' rate expectations.

Warsh's first press conference should offer a lot of clues as to his priorities as chair, Lewis said, adding he's watching for revisions to the chair's opening statement and the topics with which Warsh is eager to engage. 

"I believe that Warsh wants very much to be an effective Fed chair, and the organization is going to support that," he said. "That's the lens through which I'm viewing everything." (See: MNI POLICY: Warsh Could Reshape Fed On Rates, Communication)

MNI INTERVIEW:UK Inflation Peaks Year End, Stays High-Sentance

UK inflation is set to rise to 4% by year end before receding to 3% by the end of 2027, leaving it well above target for at least the next two years, a former member of the Bank of England’s Monetary Policy Committee told MNI.

"I see inflation running at about 3% in the next release, which comes out next week, perhaps 3.1% and then hovering round about the 3% level for a few prints," Andrew Sentance said on Thursday.

Sentance said he had updated his short-term forecasts to reflect actions the government has taken on energy prices which will ease the inflation figures down. 

"In the short term that tends to mask the rise in inflation," he said. But, "on the presumption that petrol prices remain relatively high and the higher energy costs feed through into gas and energy bills, then I see inflation going up to about 4% in the winter, and then coming back down again to around about 3% over the course of 2027 -- none of which is consistent with the 2% inflation target."

HIGHER CORE INFLATION

One of the main inputs into above-target headline inflation is higher energy prices, though Sentance argues that a higher underlying rate of inflation is also feeding through -- and that the underlying rate is higher than the 2% he believes is assumed by many City analysts.

Wage demands and nominal domestic demand all point to core inflation "somewhere around 1% above the perceived 2%. So there's a core inflation rate, effectively around 3% rather than 2%," he said. (See MNI INTERVIEW: UK Jobless Drive Productivity Rise - Saunders)

There is also a risk that food inflation could pick up again, he said, noting "quite a few warnings about food inflation from the retail sector and from the farmers. But people sort of sweep that under the carpet."

BANK REACTION

As to the Bank's reaction to the resurgence in inflation, Sentance continues to argue that tightening is needed.

"Interest rates were cut from 5.25% to 3.75% in anticipation that inflation would come back quite easily to target, so, as inflation is not coming back quite easily to target, you really have to say ‘is 3.75% the right figure?’"

"I'm not saying Bank Rate has to be back up to 5%, but somewhere between 4 and 4.5% is where you should be moving interest rates to while you're trying to exert some downward pressure on inflation," he added. (See MNI INTERVIEW: BOE Needs To Hike In July - NIESR's Millard)

The quicker inflation slows the better, because "it means that the second-round effects of the surge in oil prices are much less likely to be to be felt," he said.

According to Sentance, any communication of intent through policy action "seems to be lost on the current MPC, apart from a few notable exceptions."

"One of the good rules about monetary policy is captured by an 80s pop song by Fun Boy Three and Bananarama. 'It's not what you do, it's the way that you do it, and that's what gets results.'”

"So the way in which you manage interest rates is just as important as the actual moves that you make, and one of the problems that the MPC have currently is they're too divided to present a clear message.”

MNI RBA WATCH: Board To Hold, Maintain Tightening Bias

The Reserve Bank of Australia is expected to leave the cash rate unchanged at 4.35% at next Tuesday’s policy meeting as it assesses the impact of the 75 basis points of tightening delivered so far this year, though it is likely to maintain a tightening bias amid persistent inflation pressures.

A hold would mark the Board’s first pause in 2026 following three consecutive 25bp rate increases that fully unwound the easing cycle implemented last year and returned policy settings to a more restrictive stance. (See MNI RBA WATCH: 8-1 To Hike; Inflation-Growth Equation Worsens) Financial markets see little chance of a move next week and have priced in only around 10bp of additional tightening by year-end, suggesting investors broadly expect the current tightening cycle to be nearing completion.

However, several former RBA economists have told MNI that further rate increases are likely to be required if inflation is to return sustainably to the midpoint of the Bank’s 2-3% target band in a reasonable timeframe, arguing underlying price pressures remain too persistent to justify an extended pause at current levels. 

ECONOMIC DATA

Persistent inflation remains at the centre of policymakers’ concerns, particularly signs that medium-term inflation expectations are becoming less firmly anchored. 

While headline inflation has moderated from its peak, the Bank’s preferred trimmed-mean measure rose 3.4% y/y in April, up from 3.3% in March. The Board is closely watching whether this progress will be sustained or whether price pressures prove more entrenched.

Strong wages continue to be a key factor, with the Bank seeking to cool the rate of expansion of the Wage Price Index, last recorded at 3.3% y/y in Q2, toward a more sustainable 2.5%. (See MNI POLICY: RBA Eyes 2.5% Sustainable Wage Growth Level) Recent increases in award and minimum wages, alongside ongoing labour market tightness, are expected to feed through to services inflation over time. At the same time, weak productivity growth is limiting the economy’s ability to absorb higher labour costs without further price increases.

Taken together, these dynamics are expected to support the case for further tightening in the months ahead.

EXPERT OPINION

For now, the RBA is likely to frame the expected pause as an opportunity to assess incoming data rather than as a signal that the tightening cycle has ended. However, market pricing and commentary from former policymakers point to growing divergence over how much further interest rates may need to rise.

Former RBA staff interviewed by MNI since the May rate hike have generally agreed that further tightening is still likely this year, with August emerging as the next plausible window for an additional increase.

Real interest rates remain too low to return inflation sustainably to target within a reasonable timeframe, and the Bank may ultimately need to raise the cash rate above 5% from its current 4.35%, former senior RBA economist Mariano Kulish told MNI this month. "If I couple the path of the cash rate with inflation, the real interest rate is still too low, so I don't know what is going to bring inflation down," he said.

Separately, Justin Fabo, founder of Antipodean Macro and former head of international financial markets at the RBA, said services inflation remains the key risk to the outlook for underlying price pressures and that this will need to ease to bring trimmed mean back toward target, and reduce the likelihood of additional rate increases. He added that, absent a clearer slowdown in services inflation, the Bank could still deliver two further 25bp increases, potentially taking the cash rate to around 4.85%.