Oil prices rise as Middle East tensions escalate

Oil prices edged lower on Tuesday, with WTI price dropping to $79.1 per barrel. If oil prices retreat, they may encounter support near $72.5 per barrel, while resistance may be found near $83.3 per barrel.

Supply concerns provide support for oil prices on global geopolitical risks. The ongoing crisis in the Middle East threatens to disrupt oil distribution. Tensions in the area raise concerns that hostilities may spread further in the Middle East, affecting oil supply and distribution. 

Oil prices spiked early on Monday after a rocket strike by Hezbollah in the Israeli-occupied Golan Heights over the weekend raised concerns of an all-out war in the region. Reports that Hamas leader Ismail Haniyeh was killed by an Israeli missile strike in Iran drove oil prices up on Wednesday. The death of the Hamas leader is likely to lead to retaliatory attacks against Israel and aggravate the situation in the Middle East further. 

Oil prices are kept in check by high central banks’ interest rates. The US Fed is keeping interest rates at a 23-year high, restricting economic growth and limiting the oil demand outlook as a result. The Federal Reserve kept interest rates steady within a target range of 5.25% to 5.50% at its policy meeting on Wednesday but signaled a rate cut in September.

Fed Chair Jerome Powell’s press conference after the meeting had dovish undertones, boosting oil prices. Powell stated that the central bank aimed to keep interest rates steady in July and to discuss the possibility of a rate cut at a future meeting. Increased rate cut expectations are propping up oil prices. Currently, a 25-basis points rate cut in September is fully priced in. Moreover, after Powell’s speech, market odds of a second rate cut within the year have gone up.

Concerns about decreasing oil demand in China, the world’s largest importer, are putting pressure on oil prices. The oil demand outlook in China has been decreasing after the release of disappointing Chinese economic data. 

OPEC+ has decided to extend most of its voluntary production cuts into 2025 to boost oil prices. OPEC, however, announced that it would gradually phase out oil production cuts and laid out plans for restoring production levels within 2025. 

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Written by:
Myrsini Giannouli

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