Oil prices saw a slight increase in early trading on Wednesday, following a more than 4 percent rise in the previous session due to concerns that the Iran-Israel conflict might disrupt supplies.
Brent crude futures climbed 19 cents, or 0.25 percent, reaching $76.64 a barrel by 00:29 GMT (currently trading above $76.6). Meanwhile, U.S. West Texas Intermediate crude futures rose 23 cents, or 0.31 percent, to $75.07 per barrel (currently trading above $73.4).
Analysts noted that the market is predominantly anxious about potential supply disruptions in the Strait of Hormuz, which is responsible for transporting a fifth of the world’s seaborne oil. On Tuesday, two oil tankers collided near the strait and subsequently caught fire. The United Kingdom Maritime Trade Operations had issued a warning on Monday that electronic interference is impacting ships’ navigation systems.
Iran ranks as OPEC‘s third-largest producer, extracting approximately 3.3 million barrels per day (bpd) of crude oil. However, experts suggest that other members of the Organization of the Petroleum Exporting Countries could utilize their spare capacity to compensate for any decline in Iranian output.
Fed’s rate decision
Markets are also anticipating a second day of discussions by the U.S. Federal Reserve on Wednesday, with expectations that the central bank will maintain its benchmark overnight interest rate within the 4.25 percent to 4.50 percent range. Nevertheless, the ongoing conflict in the Middle East and the threat of slowing global growth could prompt the Fed to consider a 25 basis point rate cut in July, earlier than the market currently anticipates for September, according to Tony Sycamore, a market analyst with IG. Lower interest rates typically encourage economic growth and increase demand for oil.
Adding complexity to the Fed’s decision-making is the fact that the Middle East conflict introduces a new inflationary pressure through rising oil prices.Â
Read more: Crude oil prices climb above $73.6 amid Fed anticipation, Middle East uncertainty
Declining U.S. oil inventories
Data from the American Petroleum Institute indicated that U.S. oil inventories decreased by 10.13 million barrels (mb) last week, significantly surpassing expectations of a 0.6 mb draw. This data has fueled speculation that U.S. fuel demand is set to rise in the coming months, particularly with the approach of the travel-heavy summer season.
The API figures often foreshadow a similar reading from official inventory data, which is scheduled for release later on Wednesday. However, soft U.S. economic indicators—such as May retail sales and industrial production, which both fell short of expectations—have raised concerns over weak growth potentially leading to sluggish demand, especially as the world’s largest fuel consumer deals with high trade tariffs.
The primary focus on Wednesday remains firmly on the Federal Reserve, which is expected to keep interest rates steady. Yet, investors are betting that the Fed will adopt a more dovish stance in light of deteriorating economic conditions.
