Oil Steadies as Iran-Israel Conflict Enters Sixth Day

Summary

Oil recovers early losses to extend previous session’s 4% gain
Market fears potential Straight of Hormuz closure, analysts say
Middle East conflict complicates Fed interest rate decision

(Reuters) – Oil prices steadied on Wednesday, recovering early losses to register moderate gains after the previous session’s 4% advance as markets weighed up the chance of supply disruptions from the Iran-Israel conflict and potential direct U.S. involvement.

Brent crude futures rose 28 cents, or 0.4%, to $76.73 a barrel by 1236 GMT. U.S. West Texas Intermediate crude was up 40 cents, or 0.5%, at $75.24. Both contracts had lost more than 1% earlier in the session.

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U.S. President Trump warned on social media on Tuesday that U.S. patience was wearing thin and called for an “unconditional surrender” from Iran, an option that Iran’s leader Ayatollah Ali Khamenei rejected on Wednesday.

While Trump said there was no intention to kill Khamenei “for now”, his comments suggested a tougher stance towards Iran as he considers whether to increase U.S. involvement.

A source familiar with internal discussions said one of the options Trump and his team are considering included joining Israel in strikes against Iranian nuclear sites.

Direct U.S. involvement threatens to widen the conflict, putting energy infrastructure in the region at higher risk of attack, analysts say.

“The biggest fear for the oil market is the shutdown of the Strait of Hormuz,” ING analysts said in a note.

“Almost a third of global seaborne oil trade moves through this chokepoint. A significant disruption to these flows would be enough to push prices to $120 (a barrel).”

Iran is OPEC’s third-largest producer, extracting about 3.3 million barrels per day (bpd) of crude oil.

Meanwhile, Iran’s ambassador to the United Nations in Geneva said on Wednesday that Tehran has conveyed to Washington that it will respond firmly to the United States if it becomes directly involved in Israel’s military campaign.

Markets are also awaiting news from a second day of U.S. Federal Reserve discussions on Wednesday, in which the central bank is expected to leave its benchmark overnight interest rate in the range of 4.25% to 4.50%.

However, the Middle East conflict and risk of slowing global growth could push the Fed to cut rates by 25 basis points in July, sooner than current expectations of September, said Tony Sycamore, market analyst at trading platform IG.

Lower interest rates generally boost economic growth and demand for oil.

Complicating the decision for the Fed, however, is the Middle East conflict’s potential creation of a new source of inflation via surging oil prices.

U.S. crude stocks fell by 10.1 million barrels in the week ended June 13, market sources told Reuters, citing American Petroleum Institute figures on Tuesday. Official Energy Information Administration data is due later on Wednesday.

Reporting by Ahmad Ghaddar Additional reporting by Colleen Howe Editing by David Goodman