Gulf supply worries keep oil prices elevated and inflation concerns alive

The new trading week has opened with crude moving higher once again, and the latest unsettling reports from the Middle East are doing nothing to ease market anxiety.

Saudi Arabia's East-West pipeline, an alternative for bypassing the Strait of Hormuz that moves about 4 million barrels a day toward the Red Sea, was closed temporarily after drone attacks.

Hormuz, meanwhile, remains a clear trouble spot. Vessel movements through the waterway dropped to single digits per day over the weekend, against a 10-day average of 14 ships. Before the US-Iran war started, the strait normally saw about 125 large commercial vessels pass through each day.

The result is more upward pressure on prices, with Brent crude up 2.5% at $107.30 and WTI crude 2.7% higher at $102.70. The upside tension has not let up, coming after energy costs have risen sharply in recent weeks.

All of this lands at the start of a pivotal week, with the Federal Reserve's rate decision on the schedule.

With crude prices higher, inflation stays at the top of the market agenda. The longer oil remains expensive, the more difficult it becomes for central banks to make the case that the shock can simply be brushed aside.

That also flows directly into the bond market.

10-year Treasury yields have been hovering around 5% since late last week, while 30-year yields briefly topped 5.40% on Friday.

Inflation is one element in that argument. At the same time, traders have grown more convinced that the Fed must raise rates this week, and the latest developments have only hardened that conviction.

Market pricing now points to roughly 87% odds of a rate increase on 16 September, with a further 25 bps hike largely priced in for December.

In this case, the Fed's next move may look more straightforward. If the situation persists for much longer, though, central banks will be left with a bigger problem later.