The current energy bottleneck is not the Strait…
•Crude oil flows through the Strait of Hormuz are back to nearly 80% of pre-war levels, which is very good news. However, it doesn’t fix the biggest problem facing the U.S. oil market: a lack of diesel fuel resulting in sharply higher diesel prices. Strikes and other war damage have sharply cut refining across the Middle East leaving a glut of crude with too few places to refine it. U.S. refineries are already running at almost full capacity, so they have little room to do more. The most likely pressure valve is China, whose huge refining network is running at only 75% of capacity. Until that slack is put to work, expect diesel, and the trucking, farming, and shipping costs tied to it, to stay a stubborn source of inflation even as crude prices ease.
•Meanwhile, Wall Street’s recent advances rest on narrow shoulders. The Magnificent Seven and the broader AI ecosystem have far outperformed the broader market – carrying the major indexes higher while the rest of the market has contributed little. The gap between headline returns and underlying breadth deserves attention. When a handful of companies do the heavy lifting, the market looks healthier than the typical stock. Diversification, not chasing the leaders, is what protects portfolios when that leadership falters.
•While this week is a light on major economic or market data, next week brings fresh inflation data with both CPI and PPI due to be released. Headline CPI is expected to stay above 3% while core CPI, which excludes food and energy, is forecast to be near 2.4%. PPI is the bigger worry with economists projecting a sharp 5.4% annual increase. Producer prices tend to reach consumers eventually, and a hot print would keep pressure on the Fed to remain hawkish on interest rates.