Oil prices surge as tensions in the Middle East escalate

Oil prices jumped on Thursday, with WTI price rising from $67.3 to $68.6 per barrel. If oil prices retreat, they may encounter support near $66.1 per barrel, while resistance may be found near $68.7 per barrel.

Oil prices have been volatile this week due to geopolitical instability. Hostilities in the Gaza area were resumed this week, breaking the ceasefire deal between Israel and Hamas. Israel launched an airstrike in the Gaza area, killing more than 400 people and breaking the ceasefire deal. The Israeli government threatened that there was more to come, shuttering the peace in the region and boosting oil prices. The Israeli military has also reported the launch of a ground incursion into Gaza. In addition, US strikes over the weekend on Iran-backed Houthis militants that have been attacking commercial vessels in the Red Sea, propelled oil prices higher. 

On the other hand, Russian President Vladimir Putin agreed to pause attacks on Ukraine’s energy infrastructure for 30 days causing oil prices to plummet late on Tuesday. However, both sides resumed assaults overnight, raising questions about the validity of the peace treaty. In addition, Putin has rejected a US proposal for a full peace treaty, boosting oil prices.

Oil prices are kept in check by high central banks’ interest rates. The US Federal Reserve kept interest rates unchanged at its policy meeting on Wednesday. FOMC policymakers voted unanimously to maintain the federal funds range to a target range of 4.25% to 4.50%. Policymakers remained cautious and kept interest rates steady under a climate of economic and inflationary statements. 

The Fed, however, updated its ‘dot plot’, which is a summary of the central bank’s economic projections and reflects the central bank’s rate outlook. The latest FOMC dot plot indicated that FOMC members expect interest rates to reach a median value of 3.9% in 2025. This suggests that policymakers expect to deliver approximately two more rate cuts this year of 25 basis points each, raising market expectations of future rate cuts. Markets are pricing in two more rate cuts this year, with the first rate cut in June, while a third rate cut is also considered possible. 

Fed Chair Jerome Powell delivered a hawkish message after the policy meeting, stating that the central bank is not in a hurry to lower interest rates. Powell cited economic instability and elevated inflation risks due to trade tariffs as the reasons behind the Fed’s decision to keep interest rates steady.

Trump has been using threats of imposing trade tariffs as a negotiation tool to further his agenda with other countries. Trump has threatened to impose reciprocal tariffs on many countries, which would raise US import taxes to match those imposed by the country’s other trading partners.

Trump’s tariffs may spark global trade wars and are causing turmoil in markets. Trump has threatened to impose heavy tariffs on Canadian products, including energy products. The threat of tariffs on Canadian energy products, which are Canada’s main exports to the US, is boosting oil prices.

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Written by:
Myrsini Giannouli

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