Iran-Gulf negotiations postponed: Risk of oil price increases intensifies! Rate hike bets heat up ahead of Fed decision, adding further uncertainty to midterm elections.

Title context: Iran-Gulf negotiations postponed: Risk of oil price increases intensifies! Rate hike bets heat up ahead of Fed decision, adding further uncertainty to midterm elections. Text: A regional meeting on the Strait of Hormuz navigation issue, which the market had high hopes for, was paused at the last moment before it was due to open. The talks between Iran and Gulf states, originally scheduled for Monday in Oman, were postponed at Saudi Arabia's request. According to news on September 14, against the backdrop of continued Houthi attacks on targets inside Saudi Arabia, this first regional summit, long awaited by all parties since the United States and Israel went to war with Iran in February this year, has run aground, and Brent crude prices have recently broken above $108 per barrel. Just as the market is nervous about the Middle East conflict driving up energy inflation, the Federal Reserve will hold its monetary policy meeting on September 15-16, and bets in the interest rate futures market on a September rate hike have risen above 85%. At the same time, the U.S. midterm elections are only 50 days away. Behind the scenes of the postponed talks: Saudi dissatisfaction becomes a key variable According to Iran's Foreign Ministry, the talks were originally scheduled to be held on Monday in Oman, but were "temporarily" postponed at Saudi Arabia's request. A person familiar with the matter, who spoke on condition of anonymity because sensitive matters were being discussed, said the postponement was partly due to Saudi anger over continued attacks on its territory by Iran-backed groups such as the Houthis. "Saudi Arabia attributing the postponement of the regional summit to developments in Yemen is diverting attention from the root cause of this crisis," Iran's Foreign Ministry said in a statement on Monday. The Saudi government did not immediately respond to a request for comment. Omani Foreign Minister Badr Albusaidi, who has been negotiating with Iran for weeks on the management of maritime traffic through the Strait of Hormuz, said late on Sunday that the decision to postpone the talks was "in the interest of consensus." This would have been the first meeting between Iran, Gulf Cooperation Council (GCC) member states and Iraq since the United States and Israel went to war with the Islamic Republic in February this year. But escalating fighting between Saudi-backed forces and the Houthis entrenched in neighboring Yemen complicated plans for the meeting. Diplomatic stalemate: The U.S. "steps back behind the scenes," regional consensus remains distant Further complicating the situation is the shift in the U.S. role in Hormuz shipping diplomacy. According to three people familiar with the matter, Trump administration officials have privately told relevant Gulf parties that they want future U.S.-Iran negotiations to focus on Iran's nuclear program rather than the issue of passage through the Strait of Hormuz. This means Washington has chosen to stay out of the shipping diplomacy mediated by Oman. This "separate-track strategy" means the path to de-escalation will mainly depend on regional consensus among Iran, Oman and the Gulf states. Without direct U.S. participation, the time needed to reach a durable shipping arrangement may be prolonged, and every incident similar to the attack on Saudi pipelines could reset the negotiating process to zero. U.S. Energy Secretary Wright clearly poured cold water on the market in Vienna on Sunday, warning oil traders not to expect a breakthrough on the Strait of Hormuz issue any time soon. "Expecting a consensus agreement with Iran today is obviously not a good choice." Wright also sent a tough signal on the Iran nuclear issue, saying Tehran's nuclear program will end "no matter what." Impact: The supply chokepoint bypassing the Strait of Hormuz remains under sustained pressure The intensity of the attacks is increasing. Towns in southwestern Saudi Arabia where multiple energy facilities are located have continued to be hit hard by the Houthis this month; the Saudi government said its key "East-West pipeline" was shut down last week after multiple drone attacks from Iraq, where several Iran-backed militia groups operate. The Houthis in Yemen said in a statement on Monday that they attacked a Saudi air base in Khamis Mushait; Riyadh had previously issued potential danger alerts for southwestern cities but did not confirm the specific targets hit. Supply-side tensions are not limited to Saudi Arabia. According to previous reports, this 1,200-kilometer key export route that bypasses the Strait of Hormuz has remained closed since it was attacked on September 11, and oil storage at Yanbu port is only enough to sustain exports for 5 to 7 days; once the storage is depleted, as much as about 4% of global oil supply will be at risk, and the daily average number of oil tankers passing through the Strait of Hormuz has fallen to single digits (compared with a 10-day average of 14 previously). This east-west pipeline runs across the entire territory of Saudi Arabia, with a total length of more than 1,000 kilometers, connecting the oil-producing region along the Persian Gulf coast with export terminals on the Red Sea coast. Since the Strait of Hormuz was basically closed because of the U.S.-Iran war, Saudi Arabia has used this pipeline to shift its crude export route from the Gulf to the Red Sea, effectively avoiding the risk of a blockade of the strait. Saudi Aramco CEO Nasser said at an August earnings call that the pipeline's role in stabilizing the oil market even exceeded the large-scale U.S.-led strategic reserve release. Oil prices surge above $100 Concerns that a prolonged war in the Middle East will further tighten supplies of fuels such as diesel have pushed Brent crude to a recent high above $108 per barrel. On Monday (September 14), Brent crude rose 3% to $107 per barrel, briefly pointing toward $110, while WTI rose 3% to $102 per barrel. Last week, Brent broke above $100 per barrel for the first time since July, touching an intraday high of $109; according to market data, U.S. diesel prices have broken through a record high of $6.20 per gallon. However, U.S. officials' assessment of the supply situation is relatively more moderate. In an interview last Sunday, Wright played down expectations for a near-term Hormuz agreement. He estimated that crude and refined product shipments through the Strait of Hormuz are currently about 10 million barrels per day, and adding the bypass pipeline, "we have recovered to two-thirds or more of previous flows. The current world oil market is tighter than we would like, but it is not excessively tight." Analysts pointed out that by choosing not to directly intervene in Hormuz shipping diplomacy, the United States, the party with the greatest military leverage, is not using that leverage at the negotiating table, and the path to de-escalation will mainly depend on regional consensus. For oil prices, this means the geopolitical risk premium currently embedded in prices may fade more slowly than the market had previously expected. From gas stations to CPI: Inflation expectations are heating up across the board For the Federal Reserve, all of this could hardly have come at a worse time. Surging oil prices are pushing up prices at U.S. gas stations, and with only a little more than 50 days until the midterm elections, this has become a political problem for President Trump's Republican Party. Asked by reporters earlier on Sunday about a possible meeting between Gulf states and Iran, Trump said: "I don't care. That's their business. No problem." Inflation data had already been putting pressure on policymakers: U.S. CPI rose back to 3.35% year over year in August, while core CPI rose 0.3% month over month, exceeding expectations (according to the U.S. Bureau of Labor Statistics); a University of Michigan survey showed that one-year consumer inflation expectations rose to 4.6% in September from 4.0% in August; the 10-year breakeven inflation rate stood at 2.27%. Oil prices roil the midterm elections Persistently high energy prices are bringing increasing political pressure on the Trump administration and the Republican-controlled Congress. The U.S. national average retail diesel price broke above $6 per gallon for the first time last week, setting a record high; the average gasoline price remains elevated above $4 per gallon. Diesel is a core fuel for freight, agriculture and logistics, and its price surge means transportation costs for food and consumer goods will face a new round of upward pressure, which will then feed through to overall inflation. According to a poll last month, Democrats led Republicans by 8 percentage points on the question of which party has a better plan for the cost of living. High diesel prices especially affect Mainethe state with the highest proportion of households using heating oil in the countryas well as agricultural states such as Ohio, Kansas and Iowa. Second, a national poll commissioned by the Financial Times and conducted by London-based nonpartisan research institute Focaldata from August 28 to September 1 among 1,914 registered voters showed that only 33% of registered voters approved of Trump's job performance as president, down 3 percentage points from last month and the lowest since the survey began in May this year. The polling data clearly shows that voters' growing dissatisfaction with the economy and the cost of living is the core DRIVE behind Trump's continued decline in support. The Fed's choice this week: A rate hike is almost certain The Federal Reserve will hold its monetary policy meeting on September 15-16. Pricing in the interest rate market has clearly shifted hawkish: according to CME FedWatch, the probability of a September rate hike has risen from about 70% a week ago to more than 85%, and the market has begun pricing in a second hike before December. Institutional forecasts have turned hawkish in tandem: TD Bank and JPMorgan have shifted to forecasts of a more restrictive policy path. Traders' logic chain is clear: the postponement of the talks means the timetable for a full reopening of the Strait of Hormuz is pushed further back, while the closure of Saudi Arabia's east-west pipeline damages short-term supply elasticity; high oil prices will directly push up CPI through the energy component and, through the inflation expectations channel, reinforce the risk of a "price-wage" spiral. With the Fed under Warsh taking a tough stance on inflation, its posture of using rate hikes to hedge against energy inflation will only become more resolutethe tightening expectations already heated up by the August CPI rebound are being further cemented by the Middle East geopolitical situation.