Oil prices fell on Thursday as investors hesitated to take new positions following mixed signals by President Donald Trump regarding the potential U.S. involvement in the ongoing Middle East conflict.
Brent crude futures fell 18 cents, or 0.23 percent, to $76.52 a barrel by 4:58 GMT, after gaining 0.3 percent in the previous session when high volatility saw prices fall as much as 2.7 percent. Meanwhile, U.S. West Texas Intermediate crude futures fell 0.07 percent to $75.09 a barrel, after settling up 0.4 percent in the previous session when it dropped as much as 2.4 percent.
U.S. involvement to further raise risk premium
Despite the decent drop in oil prices, a healthy risk premium remains as traders await developments in the Middle East’s geopolitical landscape. Goldman Sachs on Wednesday said a geopolitical risk premium of about $10 a barrel is justified, given lower Iranian supply and risk of wider disruption that could push Brent crude above $90.
On Wednesday, Trump refrained from confirming whether the U.S. would join the Israel-Iran conflict, which stretched into its seventh day on Thursday. Analysts said that direct U.S. involvement would widen the conflict, putting energy infrastructure in the region at higher risk of attack. Therefore, markets remain on edge and are awaiting more concrete signals to gauge the conflict’s impact on global oil supply and regional stability.
“What began as a steady recovery—partly fueled by short-covering—turned volatile last week when Brent crude spiked as much as 13 percent, reaching $78.50 per barrel, after Israel launched a prolonged series of airstrikes on Iranian nuclear and ballistic missile facilities,” said Ole Hansen, head of commodity strategy, Saxo Bank.
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Strait of Hormuz disruption to trigger surge in oil prices
Notably, Iran is the third-largest producer among members of the Organization of the Petroleum Exporting Countries, extracting about 3.3 million barrels per day of crude oil. About 19 million barrels per day of oil and oil products move through the Strait of Hormuz along Iran’s southern coast, and there is widespread concern that the fighting could disrupt trade flows.
According to the International Energy Agency (EIA), around 20 million barrels a day transit the Strait of Hormuz, with 70 percent destined for Asia. With nearly 30 percent of the world’s seaborne oil trade moving through the passage and limited options to bypass it, any disruption to flows through the strait would have significant consequences for world oil markets.
Arne Lohmann Rasmussen, chief analyst and head of research at Global Risk Management, said that the closure of the Strait of Hormuz would be an “absolute nightmare” for the oil market. He added, “If Iran blocks this narrow chokepoint, it could affect up to 20 percent of global oil flows. A closure would likely send oil prices above $100.”
On the economic front, the U.S. Federal Reserve kept its interest rates steady on Wednesday but expected two cuts by the end of the year. Chair Jerome Powell said cuts would be “data-dependent” and that the Fed expects accelerated consumer inflation from Trump’s planned import tariffs. Lower interest rates would stimulate the economy, and as a result, demand for oil, but that could exacerbate inflation.
