Oil prices rebounded early Wednesday, extending gains from the previous session where they surged over 4% amid escalating geopolitical tensions in the Middle East. The rise is being fueled by mounting concerns that the ongoing Iran-Israel conflict could disrupt critical oil supply routes and push global energy prices higher.
As of 0029 GMT, Brent crude futures climbed $0.19 (0.25%) to trade at $76.64 per barrel, while U.S. West Texas Intermediate (WTI) advanced $0.23 (0.31%) to $75.07 per barrel.
Key Drivers Behind the Price Surge
1. Iran-Israel Conflict and Strait of Hormuz Tensions
The sixth consecutive day of aerial conflict between Iran and Israel has intensified fears of supply disruptions through the Strait of Hormuz, a chokepoint that handles nearly 20% of global seaborne oil flows.
Further exacerbating supply anxiety:
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Two oil tankers collided and caught fire near the strait on Tuesday.
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The UK Maritime Trade Operations issued a warning regarding electronic interference affecting navigation systems in the region.
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The U.S. military has begun deploying additional fighter aircraft to bolster its regional presence, escalating the potential for broader conflict.
Iran, the third-largest oil producer in OPEC, produces approximately 3.3 million barrels per day (bpd). Any disruption in its output could significantly tighten global supply.
2. Federal Reserve’s Interest Rate Path in Focus
While geopolitical fears dominate headlines, macroeconomic policy from the U.S. Federal Reserve also plays a pivotal role in oil market sentiment. The Fed is currently in the midst of a two-day policy meeting, with analysts expecting interest rates to remain in the 4.25%–4.50% range.
However, some analysts now predict a possible rate cut as early as July, citing:
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Potential economic fallout from the Middle East conflict.
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A desire to preemptively support global demand.
“Geopolitical instability, like the Iran-Israel crisis, often triggers a dovish tone from the Fed,” said Tony Sycamore, a market strategist at IG. “This could resemble the central bank’s softer stance after the October 7 Hamas attacks in 2023.”
Rate cuts typically stimulate economic activity, increasing energy demand. But rising oil prices could also reignite inflation, creating a policy dilemma for central banks.
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Oil Inventory Update:
Market data from the American Petroleum Institute (API) on Tuesday showed:
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Crude and gasoline stocks declined in the U.S.
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Distillate inventories (diesel and heating oil) increased, which could slightly ease supply pressures in colder regions.
Outlook: Volatility Ahead
Oil markets are expected to remain highly volatile in the short term due to:
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Persistent geopolitical risk premiums.
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Speculation around Fed policy shifts.
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OPEC’s potential intervention, with analysts noting that some members have spare capacity to offset any Iranian shortfall.
However, analysts caution that even temporary disruptions in oil transit through the Strait of Hormuz could lead to significant price spikes, especially if global demand remains resilient and strategic reserves are not tapped.