Baku: Oil prices experienced a downturn on Wednesday as the United States shifted its approach towards Iran, moving from military strikes to economic pressure. This change has alleviated immediate supply concerns, although uncertainties persist regarding the reopening of the Strait of Hormuz and the potential for another Federal Reserve rate hike by the end of the year.
According to Azerbaijan State News Agency, international benchmark Brent crude futures for November delivery were trading at $85.49 per barrel at 09.52 a.m. local time, marking a 2% decline from the previous close of $87.27. Meanwhile, US benchmark West Texas Intermediate (WTI) crude futures for October delivery fell by 0.6%, trading at $80.45 per barrel.
US Secretary of State Marco Rubio indicated to allied foreign ministers that Washington does not plan to initiate new strikes against Iran "for the time being," which signals a shift towards applying economic and maritime pressure, as reported by Axios. US officials have been cited as saying that Washington intends to ramp up economic pressure on Tehran through a naval blockade and tighter sanctions while facilitating the flow of as much Iranian oil as possible through the Strait of Hormuz into global markets.
While military action has not been completely ruled out if Iran were to strike first, the reduced likelihood of US strikes has eased concerns over potential military escalation that could disrupt regional oil supplies. Additionally, plans to facilitate the flow of Iranian crude through Hormuz have further assuaged supply fears.
Compounding the situation, escalating trade tensions are affecting oil prices by obscuring the global economic and demand outlook. News of an agreement between Iran and Oman to establish a temporary transit route through the Strait of Hormuz has also pressured prices downward by alleviating market players' supply concerns. Iranian Deputy Foreign Minister Kazem Gharibabadi announced that Iran and Oman would negotiate further to finalize a permanent route through the strategic waterway.
Persistent US inflation concerns are also impacting oil prices by sustaining expectations of another Fed rate hike. Data indicating a rise in US crude inventories is adding to bearish sentiment. Investors are closely monitoring upcoming US economic growth data and the personal consumption expenditures (PCE) price index, the Fed's preferred inflation gauge, for further insights into the central bank's policy direction.
Analysts suggest that a potential slowdown in the core PCE price index could alter expectations for another rate hike by year-end and increase market volatility. Higher interest rates could slow economic activity and weaken energy demand while strengthening the US dollar, making dollar-denominated oil more expensive for holders of other currencies, further weighing on prices.
The US Dollar Index, which measures the greenback against a basket of major currencies, rose by 0.1% to 99.01. The American Petroleum Institute (API) estimated that US commercial crude oil inventories increased by 4.2 million barrels last week, surpassing market expectations for a 1.8 million-barrel rise. This larger-than-expected build signaled weaker demand in the world's largest oil consumer, adding to the downward pressure on prices.