Iranian and Qatari officials held talks for a third consecutive day in Doha, and Brent crude fell more than 7% on Monday to near $105 a barrel as traders priced a possible diplomatic exit from an eight-month war that has effectively closed the Strait of Hormuz. Reuters reported that Brent reached its lowest level in more than two weeks.
The chain to Canadian portfolios has three links: the weight of energy in the TSX, headline inflation, and the Bank of Canada decision on December 9.
The Bank of Canada Link Runs Through $100
The Hub reported that oil above US$100 a barrel was the main pressure behind the Bank of Canada increase to 2.50% on October 28, and that energy prices were up 19% from a year earlier in September. Brent near $105 sits about 5% above that level, so Monday decline reduces the pressure without removing it.
Brent rose 12.0% over the seven sessions from October 21 to October 30 and closed the month at 117.64 on the expiring December contract, while Monday trading on the January contract has returned it to roughly its October 21 level.
The October 30 close is the expiring December contract, while the more actively quoted January contract settled at $113.43, according to Trading Economics. The series is a continuous front-month series, so contract rolls can affect individual days.
The rally began on October 22 after a week near $105, which means the current decline gives back the month-end move and not the earlier gains from $95 in late September.
Base Case Is Talks Without a Deal
The process is real but conditional. Iranian negotiators left Doha with a draft proposal and a possible follow-up meeting. Foreign Minister Abbas Araghchi said a two-day plan to reopen Hormuz is under discussion, conditional on U.S. acceptance of Iranian terms, according to Al Jazeera reporting on November 1. Reporting from the same day has Secretary of State Marco Rubio saying that no decision has been made.
The tail risk is a harder U.S. line after the midterm elections on Tuesday. Tim Waterer of KCM Trade puts the post-midterm risk level for Brent near $120, roughly 14% above Monday level. Reuters reported that investors fear a harder line could push North Sea Brent toward that area.
Goldman Sachs raised its December Brent forecast to $105 from $90 in a note on Sunday, which places Monday price at the bank year-end estimate. OPEC+ held December output on Sunday as expected, and the market treated Hormuz and not quotas as the driver.
Friday Energy Cushion Is Now Under Pressure
The S&P/TSX Capped Energy Index rose 1.7% to 493.69 on Friday while the broad index fell 1.74%, so energy was the cushion in Canadian portfolios on the day technology and base metals led the decline. Monday oil decline pulls on that cushion: the S&P 500 energy sector fell 2.8%, Reuters reported.
The two outcomes pull in opposite directions for the same portfolio. A deal lowers oil, helps the inflation path and the Bank of Canada, and weakens the energy earnings that supported the TSX. A harder line does the reverse. Neither is the base case, which is a negotiation that continues past Tuesday.