US retail diesel has reached $6.50 per gallon, the highest level this year. Saudi Aramco has warned European refiners not to expect crude deliveries next month after a Houthi strike damaged a third pump station on the East-West pipeline near Riyadh airport. Central banks are responding to the inflationary consequences of the prolonged energy shock: the Federal Reserve last week raised interest rates for the first time since 2023, joining the European Central Bank and the Bank of Japan in tightening monetary policy. The Trump-Xi summit on Thursday is the week’s key event, with markets watching for any signal on Iranian oil sanctions and China’s role as a swing consumer.
Saudi Arabia supply security deteriorates further
The Red Sea picture has improved since the previous week but remains severely disrupted. Traffic through Bab el-Mandeb remains compressed, with only four very large crude carrier exits via the Gulf of Suez recorded between 8 and 14 September. The Houthis control the full Red Sea shoreline and the island of Perim, giving them the capability to sustain a tolling posture or tighten restrictions further. Hormuz tanker movements recovered to above 6 million barrels per day from last week’s trough, though whether that recovery is durable remains uncertain as several attacks on commercial vessels were also reported in the period.
Central banks tighten as the energy shock feeds inflation
The Federal Reserve raised its policy rate to 3.75-4% in a unanimous 12-0 vote, the first increase since 2023. The September projections put 2026 GDP growth at 2.3%, headline inflation at 3.7% and unemployment at 4.1%, signaling stronger growth and hotter prices than the June round. Sixteen of the 18 policymakers who submitted projections see at least one further hike this year. Fed Chair Kevin Warsh withheld his own dot, describing the projections as those of his colleagues, in a move widely read as a deliberate distance from political pressure given Trump’s continued calls for rates at 1% or below.
The Bank of Japan raised its policy rate to 1.25%, the highest since 1995, though the yen found little support as the nominal differential with the Fed remains unchanged. The Bank of England held at 3.75% in a 6-3 vote, with the majority waiting for clearer signs of second-round wage and price effects, though it signaled that tightening becomes increasingly likely the longer the energy crunch persists. Major central banks have converged on a hawkish stance, citing the prolonged energy crisis as the primary inflation threat. Higher rates add a second drag on economic activity on top of the energy shock itself, through borrowing costs, bond yields and corporate and household spending.
The Trump-Xi summit: energy trade sits beneath the AI headlines
Xi Jinping arrives in Washington on 24 September with market expectations centered on an AI framework agreement. For energy markets, the more relevant questions are whether the summit produces any signal on secondary sanctions against buyers of Iranian oil and how Washington intends to handle the more than $10 billion in outstanding Venezuelan debt owed to Chinese lenders, now that the new US oil deal routes those barrels through a partly US-owned entity. China Gas Holdings signed a 20-year, 0.5 million-tonne-per-annum LNG offtake with Venture Global last week, a deal that is largely symbolic at under 1% of China’s annual LNG imports but gives Washington a visible win on energy exports ahead of the meeting.
The broader geopolitical backdrop has also shifted on Canada and Greenland. European Commission President Ursula von der Leyen offered Canada a path toward EU associate membership, a status with no current basis in EU law, in a move read as symbolic realignment rather than a substantive near-term trade shift given that US-Canada trade is nearly six times the size of EU-Canada trade. Trump responded by threatening heavy tariffs if the arrangement proceeds. Separately, Trump reached a Greenland security agreement with Denmark, due for signing at the UN General Assembly, that bars non-NATO bases on the island and formally sets aside earlier annexation threats.
What markets are watching this week
The two-year Treasury yield rose on the hawkish Fed, oil eased toward the end of last week on the Saudi pipeline news being judged as manageable, and the S&P 500 ended last week 0.1% lower after failing to recover from its post-rate-decision losses. The dollar strengthened alongside Treasury yields. US and Eurozone flash purchasing managers’ indices for September, both due on 23 September, will provide an early read on whether expensive energy, rising rates and higher bond yields are beginning to weaken activity in earnest. The China-US summit on Thursday is the single scheduled event most likely to move energy markets. War, inflation, AI sentiment and bond yields are increasingly connected variables, and the transmission between them becomes more visible as economic and supply chain buffers thin.
