- Oil prices have slid back toward pre-war levels as crude flows pick up in the Strait of Hormuz.
- Apollo's top economist Torsten Sløk says lower oil prices may lead to higher inflation.
- "The reopening of the Strait of Hormuz will further overheat the economy," Sløk said.
Oil prices are pulling back toward pre-war levels, but one economist doesn't see the move as a reason to expect lower inflation.
US oil prices dropped by about 4% on Wednesday, briefly dipping below $70 a barrel for the first time since early March. Brent oil fell 5% to about $72 a barrel.
The drop follows the US and Iran's signing of a memorandum of understanding to end the nearly four-month conflict, with crude flows through the Strait of Hormuz picking up on Wednesday.
High oil prices driven by the war led to a resurgence of inflation worries in the last few months, but Apollo Global Management's top economist says that cheaper oil isn't necessarily a reason to expect disinflation.
"The narrative in markets is changing from 'lower oil prices mean lower inflation' to 'lower oil prices mean more demand in an already overheating economy, which means higher inflation,'" Torsten Sløk wrote on Wednesday.
Apollo Global Management
He pointed to a slew of factors that he says show inflation continues to rise even as oil has pulled back from wartime highs.
"Driven by the strong April CPI, hot May non-farm payrolls and a hawkish Fed, the market narrative now suggests that the reopening of the Strait of Hormuz will further overheat the economy, forcing the Fed to raise interest rates soon," the leading economist laid out.
Oil prices accelerated their declines from recent peaks after the US and Iran signed a tentative deal on June 17. Since then, the details and sticking points of the agreement have come into focus, but oil has continued its decline.
Market experts expect the downward move to continue.
"Oil prices are likely to remain under pressure as supply recovers and risk premiums continue to unwind," MUFG Research analyst Soojin Kim said.
"While key issues, including Iran's nuclear program, the Lebanon ceasefire, and the full reopening of Hormuz, remain unresolved, the market is increasingly pricing in a normalisation of regional energy flows," the analyst added.
This week, analysts at Goldman Sachs said that the disruption to energy flows will be offset in the coming year by more widespread adoption of electric vehicles around the world.
The bank said that the oil shock will fade, driving Brent crude prices to the mid-$50 a barrel level by the end of 2027, a drop of about 23%.
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