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Hello Power Up readers,

After a whirlwind of speeches, threats, peace overtures and a summit between the US and Chinese leaders in Washington last week, the US-Iran standoff remains pretty stagnant. But not entirely.

Oil prices rebounded by around 3% to above $107 a barrel on Monday morning after President Donald Trump rejected a peace deal from Iran that would have reopened the Strait of Hormuz. While this has again dashed hopes of a breakthrough, oil flows through the critical waterway have grown steadily in recent weeks, suggesting that both sides are for now comfortable with the status quo.

Exactly seven months since the start of the Mideast conflict, the energy markets are slowly acknowledging that many of the war’s consequences could linger for far longer than initially anticipated. This is fundamentally changing the strategic calculus for the world’s oil and gas majors. More on this below.

As always, feel free to contact me at ron.bousso@thomsonreuters.com or connect with me on LinkedIn with any questions or thoughts.

Elevated oil prices are stoking concerns of persistently higher global inflation, increasing expectations that central banks will push up interest rates. Government bond yields last week soared to new multi-decade highs, aggravated by hot US business activity data and rising government debt concerns.

The energy and financial markets also continue to question whether the Trump administration will impose a ban on diesel exports in the coming weeks in an attempt to lower soaring diesel prices, which rose above $6.50 a gallon ahead of the November midterm elections. After holding talks with American refiners last week, the administration seems to be searching for an alternative to a short-term ban.  

The possibility of a ban is already having an impact on the market, as the gap between US crude oil futures and the global Brent benchmark has widened, a signal that markets expect US refiners to process less crude oil if their diesel output gets stuck at home.

Big Oil continues to benefit from the global shortage of refining capacity.

The world's biggest energy companies are poised to deliver another quarter of bumper profits, fuelled by record refining margins. Flush with cash, these oil and gas majors now need to chart a course for future growth in a world reshaped by the Middle East crisis.

Big Oil has seen its cash coffers balloon this year. The five largest Western oil companies - BP, Chevron, ExxonMobil, Shell and TotalEnergies are expected to report combined third-quarter profits of around $53 billion, according to RBC Capital Markets estimates, up from $48 billion in the second quarter and more than ‌double year-earlier levels.

Yet since the start of the Iran war in late February, oil majors have largely reacted cautiously to this windfall, directing billions toward debt reduction rather than major new investments.

That approach made sense in the early months of the conflict, when energy markets were swinging wildly on every headline and investors largely accepted US President Donald Trump's prediction that the war would be short-lived.

Seven months later, the industry finds itself facing a very different reality.