Oil prices rebound modestly—but capital is still repositioning

This week’s modest rebound in oil prices—up nearly 1%—has offered a momentary sense of calm. But for institutional capital, the episode has already triggered a deeper recalibration. The sharp 13% drop earlier this week was not just a reaction to a ceasefire between Iran and Israel—it was a signal that geopolitical risk premiums can evaporate faster than rate expectations can anchor macro portfolios.

On Wednesday, Brent settled at US$67.68 per barrel, while WTI climbed to US$64.92. These moves only partially recover the drawdown that followed US President Donald Trump’s announcement of a ceasefire. Before that, oil had rallied sharply on the back of Israel’s June 13 strike on Iranian military and nuclear facilities, and further gains came after the US conducted its own attack on Iranian nuclear infrastructure. Those highs—five-month peaks—were quickly abandoned. The market repriced with speed and conviction, reflecting how narrowly balanced the oil narrative has become: geopolitical shocks drive immediate upside, but in their absence, the demand side takes control—and it's structurally weaker.

The shock that jolted oil markets upward in mid-June was fundamentally exogenous. Military escalation between two heavily sanctioned states—one of which sits atop the Strait of Hormuz—was a classic risk scenario. Yet the resolution came equally swiftly.

What’s notable is how little of the earlier premium remained once the ceasefire was announced. Traders, funds, and allocators pulled capital out of energy exposure rapidly, with Brent and WTI both falling to levels not seen since early June. The message was clear: in the absence of sustained conflict, oil does not currently command a premium above its demand-weighted fair value.

That fair value itself is softening. Even as US inventory data supported a near-term rebound—crude and gasoline stocks fell more than expected—the broader macro narrative is tilting toward stagnation, not expansion.

With supply-side risk deflating, capital has begun rotating toward more conventional demand signals. Energy equities are no longer a straight geopolitical hedge; they now compete with rate-sensitive sectors for macro attention.

The latest US data supports that shift. Crude inventories fell by 5.8 million barrels, and gasoline stocks posted an unexpected 2.1 million barrel drop. Gasoline supplied—widely used as a proxy for real consumption—reached its highest level since December 2021. This explains the modest support in oil prices midweek, but it also shifts the focus back to domestic fundamentals.

Funds are increasingly looking to US-centric demand indicators and are de-risking commodity exposure in favor of more liquid, rate-anchored trades. Commodity-linked currencies like the Canadian dollar and Norwegian krone remain underweight, while dollar positions are holding.

The oil market’s correction—and partial recovery—comes as the Federal Reserve enters a pivotal phase. A suite of US macroeconomic data this week, including consumer confidence numbers, point to softer-than-expected growth. That has reignited expectations of a rate cut as early as September.

Normally, easing monetary conditions would support oil demand. But this is not a typical easing cycle. The demand softness appears to be structurally linked to high interest rate drag, persistent inflation fatigue, and constrained industrial output—particularly in Europe and parts of Asia. That means any upcoming Fed cut may not generate the usual uplift in oil demand. Instead, it might simply mark the end of a defensive monetary cycle, with muted transmission effects to real consumption.

With Middle East tensions de-escalating, one might expect capital to return to emerging markets and energy-leveraged positions. That hasn’t happened. Instead, safe-haven flows continue to favor short-duration US Treasuries, reserve-backed ETFs, and rate-stable markets like Singapore and Saudi Arabia. Even Gulf sovereigns—normally buffered by oil surpluses—are facing quieter inflows. Investors are hedging against two risks simultaneously: underwhelming global demand and volatile supply flashpoints.

While KSA and UAE continue to benefit from fiscal discipline and reserves strength, they are not commanding the risk-on flows they did in 2022. The oil narrative is no longer about supercycle potential—it’s about navigating volatility clusters.

Oil’s rebound tells a narrower story than the headlines suggest. Demand-side resilience in the US provided modest support, but the broader shift is underway: capital is rotating out of supply-shock hedging and into macro policy watch. This price band—US$65–70—isn’t a comfort zone. It’s a signaling zone, where central bank posture, inventory signals, and geopolitical repricing intersect. Allocators aren’t chasing oil—they’re repositioning around it.

This may not be a reversion to calm. It’s a rebalancing that acknowledges energy remains volatile—but no longer unilaterally decisive in the capital allocation narrative.