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Oil up 20% in June but well below 2022 peak

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Dollar correlation with oil weakening

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Market inflation expectations creeping up

LONDON, June 20(Reuters) - Brent crude oil is up around

20% so far in June, and set for its biggest monthly jump since

2020 as Israel/Iran tensions flare-up.

Although relatively contained, the rise has not gone

unnoticed just three years after Russia's invasion of Ukraine

triggered a surge in energy prices that ramped up global

inflation and sparked aggressive interest rate hikes.

Here's a look at what rising oil means for world markets.

1/ HOW HIGH?

Oil prices have crept rather than surged higher with

investors taking comfort from no noticeable interruption to oil

flows.

Still, pay attention.

The premium of first-month Brent crude futures contract to

that for delivery six months later this week rose to a six-month

high as investors priced in an increased chance of disruptions

to Middle East supply . It remained elevated on

Friday.

Trading at around $77 a barrel, oil is below 2022's

$139 high, but is nearing pain points.

"If oil goes into the $80-100 range and stays there, that

jeopardizes the global economy," said ABN AMRO Solutions CIO

Christophe Boucher. "We are just below that threshold."

2/ SUPPLY SHOCK?

Traders have an eye on shipping, often seen as a key energy

bellwether.

About a fifth of the world's total oil consumption passes

through the Hormuz Strait between Oman and Iran. Disruption here

could push oil above $100, analysts say.

Blocked shipping routes would compound any supply shock.

Though the big oil producing countries that make up OPEC+ have

promised an extra 1.2 million barrels a day, none has yet been

shipped or delivered, said hedge fund Svelland Capital director,

Nadia Martin Wiggen.

Blocked shipping routes would mean this expected supply

would not come into the international market, she said.

She's watching freight rates closely.

"So far, freight rates show that China, with the world's

biggest spare refining capability, hasn't started panic buying

oil on supply concerns," said Wiggen.

"Once China starts to buy, freight rates will rise, and

world's energy prices will follow."

3/ NO OIL, NO GROWTH

Rising oil prices raise worries because they can lift

near-term inflation and hurt economic growth by squeezing

consumption.

High oil prices work like a tax, say economists, especially

for net energy importers such as Japan and Europe as oil is hard

to substitute in the short term.

Lombard Odier's chief economist Samy Chaar said that

sustained oil prices above $100 a barrel would shave 1% off

global economic growth and boost inflation by 1%.

Unease rose after Israel launched its strike on Iran a week

ago. An initial rally in safe-haven bonds soon evaporated as

focus turned to the inflationary impact of higher oil.

The euro zone five-year, five-year forward, a

closely-watched gauge of market inflation expectations, climbed

to its highest level in almost a month.

"In the United States $75 oil is enough to, if it's

sustained, boost our CPI forecast by about half a percent by the

year end, to go from 3 to 3.5%," said RBC chief economist

Frances Donald.

Turkey, India, Pakistan, Morocco and much of eastern Europe

where oil is heavily imported are set to be hit hardest by the

rise in crude prices. Those that supply it; Gulf countries,

Nigeria, Angola, Venezuela and to some degree Brazil, Colombia

and Mexico should get a boost to their coffers, analysts say.

4/ OH KING DOLLAR

A shift is taking place in the dollar.

In recent years the currency has risen when oil rallies, but

it has had only limited support from oil's latest rise, with a

weekly gain of just 0.4%.

Analysts expect the dollar's downward trend to resume, given

expectations of limited Middle East risks for now and underlying

bearish sentiment.

It has weakened around 9% so far this year against other

major currencies, hurt by economic uncertainty and concern about

the reliability of U.S. President Donald Trump's administration

as a trading and diplomatic partner.

No doubt, a weaker dollar heals the sting from higher oil,

which is priced in dollars.

"For oil-importing countries, the dollar's fall offers some

relief, easing the impact of soaring oil prices and mitigating

wider economic strain," UniCredit said.

5/ COMPLACENT STOCKS?

In the absence of an oil-supply shock, world stocks are

happy to stick near all-time highs.

"Investors want to look past this until there's a reason to

believe this will be a much larger regional conflict," said

Osman Ali, Goldman Sach's Asset Management's global co-head of

Quantitative Investment Strategies.

Gulf markets sold off on the initial news, then stabilised

somewhat, helped by the higher oil prices. U.S. and European

energy shares, particularly oil and gas companies have

outperformed , as have defence stocks.

Israeli stocks, up 6% in a week, have been the most

notable outperformer.

Stocks of oil consumers have been the worst hit, airlines

stand out.