The ‘Cheaper Oil Next Year’ Bet Just Got $5 Pricier

FOMC Alerts · October 23, 2026

How do oil prices affect interest rates?

How do oil prices affect interest rates? Mostly through three prices you can check: what traders expect oil to cost later, how much inflation the bond market builds into yields, and what fed funds futures say the Fed will do. Right now each one tells a slightly different story, and none of them is “oil just went up.”

Start with the barrel that matters for next year. December 2027 WTI crude futures closed at $80.67 on Oct 22, up $5.23 since Sep 30 and about $19 above where they sat on Feb 27, the day before the war in the Middle East began (Yahoo Finance, NYMEX, delayed). Traders still expect oil to get cheaper. They just don’t expect it to get as cheap as they did three weeks ago.

The 2027 oil price: cheaper, just not as cheap

Oil futures slope steeply down from here, which traders call backwardation. At the Oct 22 close the curve looked like this:

From the December 2026 contract to December 2027, WTI falls $18.80 (18.9%) and Brent $26.59 (23.5%). Spot crude sits about $27 to $29 above the December 2027 contracts. So the market’s base case is still that prices ease by late 2027. What changed is where they ease to: roughly $81 to $87 a barrel, against $62 to $66 before the war. December 2027 Brent is up $5.33 since Sep 30 (Yahoo Finance).

The government’s forecasters moved the same way. In its October Short-Term Energy Outlook, the Energy Information Administration raised its 2027 Brent forecast to $84 a barrel, from $74 a month earlier. It sees Brent averaging $105 in the fourth quarter and $96 for 2026 (EIA). That’s a forecast, finished Oct 1, and December 2027 Brent futures now sit about $2.60 above it. Axios made the same point Oct 21: the oil market’s 2027 relief hopes are fading (Axios).

Which oil actually rallied

The “oil rally” headlines need one fix. Since Sep 30, WTI spot is up 11.0%, to $107.89 on Oct 20 (EIA). Brent spot is down 0.6%, at $115.22, and about 15% below its Oct 2 high of $135.51 (EIA). The front-month futures rose too: through the Oct 22 close, WTI 10.0% and Brent 9.3%. So the move is in WTI and in the futures curve, not in Brent spot. Reuters linked Thursday’s rise to more Houthi attacks in Saudi Arabia (Reuters via MarketScreener); that attribution is Reuters’.

Pump prices lag crude. Regular gasoline averaged $4.424 a gallon in the week of Oct 19, 4.4% below its May peak of $4.628 and well above the $3.072 of late February (EIA). EIA expects gasoline to average $3.91 this year and $3.56 in 2027. For the household side of those pump prices, see whether wages are keeping up with inflation. For how energy feeds the inflation numbers the Fed reacts to, see what Fed hikes can and can’t reach.

Breakeven inflation: is the bond market buying it?

Breakeven inflation rates are the gap between regular Treasury yields and inflation-protected ones. They’re a rough read on how much inflation investors are pricing (they also carry some risk and liquidity premium). This leg of the oil rally showed up only in the near-term one.

Source: FRED and FRED; Treasury’s own nominal and real yield curves give the same 5-year and 10-year numbers. The long-run gauge, the 5-year, 5-year forward rate, covers expected inflation five to ten years out. It’s still above its pre-war 2.10%, but it has fallen 17bp since Sep 30, to 2.19% on Oct 22. The 5-year breakeven is up 9bp since Sep 30 and a touch above its Feb 27 level, while the 10-year is down 4bp.

By our calculation, daily changes in Brent this year moved with the 5-year breakeven (correlation 0.56) far more than with the long-run 5-year, 5-year rate (0.12). Oil moves near-term inflation pricing. This fall it hasn’t moved the long-run anchor. The 10-year’s own story, supply and term premium, is in who sets the 10-year.

The December number, decoded

December hike odds slid on Thursday and bounced back on Friday. As of about 11:40 AM ET Oct 23, our calculation, using CME’s FedWatch method on fed funds futures, puts the chance that the target range sits above today’s 3.75-4.00% after the December 8-9 meeting at 81.0%. That number needs a label: it is cumulative. It includes an October move, so it is not the odds of the December meeting on its own. Thursday afternoon the same calculation read 72.1%.

• Our calc, same method: 10.0% for an October hike and 81.0% for above today’s range after December, from delayed fed funds futures quotes between about 9:50 and 11:25 AM ET Friday. Using bid or ask instead of the last trade moves that to between 76% and 81%.
• December on its own: about 79% (78.9%), if October holds.
• Prediction markets price meetings one at a time. At 11:39 AM ET Friday, a December +25bp move was 71-72 cents on Kalshi, plus 4-5 cents for something bigger. Polymarket had the same move at 74-75 cents. That’s roughly 75-78 cents for any December hike, close to the futures’ 79%.
• The Atlanta Fed’s tracker showed 86.9% on Oct 22, down from 94.1% on Oct 20, but it uses SOFR options over a different window, mid-December to mid-March (Atlanta Fed).

Did oil move the odds? Not this month. Kalshi’s December hike contract was 71 cents on Sep 30, peaked at 79 cents on Oct 14, was 75 cents on Oct 21, 65-67 cents by Thursday afternoon and back to 71-72 cents by late Friday morning. Thursday’s drop came as Treasury yields fell on an AI-stock selloff and a flight to quality, with the 2-year yield down 10.7bp (Reuters via The Globe and Mail). The bigger shift this month was October: Kalshi’s October hike odds were about 70 cents in late September and were 7-8 cents on Friday. Traders pushed the hike to December, wobbled on it Thursday, and leaned back in on Friday. Futures imply an end-December rate near 4.10%, a bit less than one full hike above today’s 3.88% effective rate. How these odds are built is in how to read fed rate odds.

What the Fed has said about oil this year

The Fed’s statements tracked oil closely. In March it called the implications of developments in the Middle East for the U.S. economy uncertain (Fed, Mar 18). By April it was direct: “Inflation is elevated, in part reflecting the recent increase in global energy prices.” (Fed, Apr 29). June and July still pinned part of inflation on supply shocks, including energy, and in July Hammack, Kashkari and Logan dissented in favor of a hike (Fed, Jul 29).

The Sep 16 statement raised rates with no dissents and dropped the energy reference. It said only that inflation remains elevated, and it put uncertainty partly down to geopolitical developments (Fed, Sep 16). The word to watch on Oct 28: does energy come back into the inflation sentence?

History is thin here. In 2008, WTI peaked at $145.31 on Jul 3 (EIA). The Fed held at 2% on Jun 25 and Aug 5, with Richard Fisher dissenting for a hike both times (Fed, Fed). By Dec 31 WTI was $44.60. This year the Fed waited about six months after the late-February shock, then moved. Two episodes are a description, not a forecast.

What to watch

• Wed Oct 28, 2:00 PM ET: FOMC statement. Check the inflation sentence for energy. Warsh’s press conference follows at 2:30 PM ET.
• Thu Oct 29, 8:30 AM ET: September PCE inflation and the first estimate of third-quarter GDP. Preview: what to expect from Q3 GDP.
• Tue Nov 10: EIA’s next Short-Term Energy Outlook, with an updated 2027 forecast.
• Dec 8-9: the meeting the December odds refer to (81.0% cumulative, 78.9% December alone, our calc, ~11:40 AM ET Oct 23).

The full schedule and everything we’ve written ahead of Oct 28 is on the FOMC Alerts hub.

What it means for 0DTE

• Event risk: Oct 28 at 2:00 PM ET is the scheduled event. Oct 29 at 8:30 AM ET lands before the cash open. Oil headlines in between are commentary until they show up in the data.
• Premium: The VIX sets the price of SPX options. Check it before each date rather than assuming oil already priced it.
• Structure: Keep risk defined and know your max loss before entry, especially into a statement where the wording is the event.
• Plan, don’t predict: Two scenarios for Oct 28: energy returns to the statement, or it stays out. Plan both. Neither is a call.

Related reading

• Energy, Tariffs, Housing: What Fed Hikes Can Reach: why rate hikes don’t add barrels.
• 13% or 16%? How to Read Fed Rate Odds Like You Wrote the Math: the odds, step by step.
• The Fed Sets the Short End. Who Sets the 10-Year?: supply and term premium.
• October FOMC Hike Odds Fade, December Hike Seen: how the hike moved from October to December.
• How to Plan Market Scenarios for 0DTE SPX: turning the two Oct 28 scenarios into a written plan.
• All FOMC Alerts coverage: every Fed, rates and data piece in one place.

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