Oil prices climbed more than 4% on Wednesday after renewed military confrontation between the United States, Saudi Arabia and Iran heightened fears of prolonged supply disruptions in the Middle East, while a larger-than-expected drawdown in U.S. crude inventories added further support to the market.
Brent crude futures rose $3.72, or 4.4%, to $87.81 a barrel by 1025 GMT, while U.S. West Texas Intermediate (WTI) gained $3.43, or 4.3%, to $82.69 a barrel, extending a rally driven by mounting geopolitical risks.
The latest advance comes as traders reassess the likelihood of a sustained disruption to oil exports from the Gulf, home to roughly a third of global seaborne crude shipments, amid growing uncertainty over the security of the Strait of Hormuz, the world’s most critical oil shipping chokepoint.
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“Renewed military strikes in the Middle East and Iranian officials reiterating that they want to control shipping activity through the Strait of Hormuz amid depressed oil flows through the Strait are lifting oil prices again,” said UBS analyst Giovanni Staunovo.
The price surge followed joint U.S. and Saudi military strikes on Iran-backed groups in Iraq, which Washington and Riyadh blamed for drone attacks targeting Saudi oil facilities.
The strikes came just hours after the U.S. military said it had intercepted an attempted Iranian ballistic missile attack targeting American forces in the region. According to U.S. Central Command (CENTCOM), Iran’s Islamic Revolutionary Guard Corps launched multiple missiles in what it described as an attempted surprise attack, but all were intercepted before reaching their targets.
Iran, meanwhile, said it had fired on ships transiting the Strait of Hormuz and targeted U.S. military bases in Jordan, underscoring the growing risk that the conflict could spill further across the region and threaten global energy infrastructure.
Adding to concerns, Tehran rejected an Omani proposal for joint regional management of the Strait of Hormuz, according to a senior Iranian official. The rejection dashed hopes for a diplomatic breakthrough that could have eased months of disruptions to one of the world’s busiest energy trade routes.
The Strait of Hormuz carries approximately one-fifth of global oil consumption and a significant share of liquefied natural gas exports. Any prolonged disruption would tighten global supplies and could quickly push energy prices higher, particularly as OPEC producers in the Gulf rely heavily on the passage to reach international markets.
Shipping data point to the scale of the disruption. Only a handful of commodity vessels have passed through the Strait of Hormuz so far this week, revealing heightened security risks and rising insurance costs.
Attention has now shifted to the Bab el-Mandeb Strait, an alternative route linking the Red Sea to the Gulf of Aden. Five commercial vessels transited the waterway on Wednesday, following 39 on Tuesday, the highest daily traffic since July 19 before Yemen’s Iran-backed Houthi movement announced a maritime blockade targeting Saudi Arabia.
Regional sources also told Reuters that the Houthis are considering imposing transit fees on commercial vessels sailing through the southern Red Sea, potentially creating another source of upward pressure on shipping costs and energy prices.
Analysts say the market is likely to remain highly sensitive to military developments.
“We believe Brent oil prices will continue to whipsaw in the $80-$100 per barrel range in the near term as the conflict ebbs and flows in the Middle East,” said Suvro Sarkar, head of energy research at DBS Bank.
Sarkar said recent diplomatic signals from U.S. President Donald Trump had briefly raised hopes of de-escalation, but the latest exchange of military strikes suggests the conflict remains highly unpredictable.
“This series of stop-start negotiations means a complete removal of the Strait of Hormuz blockade is not achieved, and oil prices could see a higher floor of around $80 per barrel even under a de-escalation scenario,” he said.
Supporting the rally, industry data showed U.S. crude inventories fell by approximately 3.3 million barrels during the week ended July 24, according to market sources citing figures from the American Petroleum Institute (API). The drawdown suggests refinery demand remains resilient during the peak summer driving season and points to a tighter U.S. supply balance ahead of official inventory figures from the Energy Information Administration (EIA) later on Wednesday.
Supply expectations were further tightened after Reuters reported that OPEC+ is likely to suspend planned oil production increases for three months beginning in October once the producer group completes the scheduled return of barrels that had previously been withheld under voluntary production cuts.
A pause in output increases would limit additional supply entering the market just as geopolitical risks threaten exports from the Middle East, reinforcing expectations of tighter crude balances during the final quarter of the year.
Federal Reserve Decision in Focus
Beyond geopolitical developments, investors are also closely watching the U.S. Federal Reserve’s policy decision later on Wednesday, with higher oil prices complicating the central bank’s inflation outlook.
The Federal Open Market Committee (FOMC) is widely expected to keep its benchmark interest rate unchanged within the 3.5% to 3.75% range. However, markets have increasingly begun pricing the possibility of further tightening after renewed energy inflation and resilient economic data.
According to CME Group’s FedWatch Tool, traders see a 76% probability of a September rate increase, while some analysts have warned there is also a meaningful risk of an unexpected rate hike at Wednesday’s meeting.
“We’re going into this meeting with around a one-in-three chance for a rate hike priced in. It’s the first time we’ve seen pricing like that for a while. There is genuine uncertainty around this meeting, and I would expect that to lead to some volatility on the outcome, whichever way it breaks,” said Nick Rees, head of macro research at Monex Europe.
The resurgence in oil prices presents a fresh challenge for Fed Chair Kevin Warsh. Although U.S. inflation eased unexpectedly in June, bringing the annual consumer price index to 3.5%, sustained increases in energy prices risk slowing further progress toward the Fed’s 2% inflation target.
Dollar Steadies, Treasury Yields Edge Higher
Currency markets remained relatively subdued despite the geopolitical escalation, as investors largely refrained from making significant positions ahead of the Fed announcement.
The U.S. Dollar Index, which measures the greenback against six major currencies, eased 0.08% to 101.33 after touching a one-month high of 101.63 on Tuesday.
The euro edged up 0.09% to $1.1395, recovering slightly after falling to a one-month low in the previous session, while sterling gained 0.06% to $1.3298, remaining near its weakest level since early July.
The Japanese yen strengthened 0.18% to 163.55 per dollar but remained close to a 40-year low, keeping markets alert for possible intervention by Japanese authorities.
“There is a possibility that the FOMC’s policy decision and the Chair’s press conference could trigger a further strengthening of the dollar, pushing USD/JPY to 164,” said Hirofumi Suzuki, chief FX strategist at SMBC.
“The likelihood of FX intervention appears significant, as Japanese financial authorities have stepped up their warnings.”
Meanwhile, U.S. Treasury yields edged higher as investors awaited the Fed’s decision. The benchmark 10-year Treasury yield rose to 4.614%, while the 2-year Treasury yield, which is particularly sensitive to monetary policy expectations, increased to 4.291%. The 30-year Treasury bond yield held broadly steady near 5.1%.
Bitcoin rose 0.7% to $64,313, while Ether slipped 0.12% to $1,914, with cryptocurrency markets also adopting a cautious tone ahead of the central bank’s policy announcement.
The bottom line is that the convergence of escalating geopolitical tensions, constrained oil supplies, expectations that OPEC+ will restrain production growth, and uncertainty over the Federal Reserve’s next policy move has created a volatile backdrop for global financial markets.