Crude oil prices could soften if geopolitical tensions ease, as current prices of around $115 per barrel include a significant risk premium, according to Neeraj Seth, Founder and Chief Investment Officer at 3R Investment Management.

He believes a combination of a Democratic sweep in the US midterm elections and an electoral defeat for Benjamin Netanyahu in Israel could help de-escalate tensions and support a rally in Middle Eastern markets.

“It doesn't completely resolve the problem, but the further escalation, obviously, both if you get the combination of US midterm towards a Democrat sweep and Israel election obviously going against Netanyahu. I think you will get some respite,” Seth said.

Seth also warned that the recent cooling of US bond yields may be temporary, with the long end of the yield curve likely to come under renewed pressure over the next three to six months. Despite the US 10-year Treasury yield recently dipping below the 5% mark, he believes the worst of the stress surrounding rising yields is not over.

“I think the concern I have is more around the long end of the curve driven by the fiscal situation, inflation, which is sticky, and the demand for capital,” Seth said.

He expects one or two additional rate hikes from the US Federal Reserve. The recent respite in the 10- to 30-year segment of the yield curve was largely driven by the unwinding of short positions in US Treasuries over the past two weeks. Seth does not expect this relief to last unless there is an improvement in the fiscal outlook or the inflation trajectory.

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