Oil Spikes 3% as Geopolitical Tensions and US Rate Cut Hopes Collide

Saudi Arabia and Russia Maintains voluntary oil cut as Oil price falls more than $3 on demand fears

Saudi Arabia and Russia Maintains voluntary oil cut as Oil price falls more than $3 on demand fears

Tuesday saw a notable increase in oil prices, which went up 3% to reach their highest point in almost a month. This spike was propelled by a powerful combination of rising interest rate decreases in the United States and intensifying geopolitical concerns in the Middle East.

The World Bank has warned that if Israel’s battle in Gaza turns into a full-fledged Middle East conflict, oil prices might rise above $150 per barrel.

“There’s plenty of geopolitical tensions today in terms of the Middle East … and it has given some angst here to the security of the transit of oil and other goods,” said John Kilduff, partner with Again Capital LLC.

The group said that even a “small disruption” may cause prices to rise above $100 per barrel from their current level of just under $90, drawing a parallel between its most dire scenario and the Arab oil embargo of 1973.

Following Maersk’s temporary suspension of routes through the waterway last week, fears about supply chain delays resulting from Houthi attacks on ships in the Red Sea have resurfaced. Even though shipping has now resumed, traders remain on edge due to the possibility of additional assaults, which drives up oil prices.

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As the conflict with Palestinian terrorists run by Hamas in the Gaza Strip spreads to other parts of the region, an Israeli minister made hints on Tuesday that his nation had responded to strikes against it in Iraq, Yemen, and Iran.

The real supply has not yet been impacted, despite worries about the Middle East and ship rerouting. Some relief was provided by Maersk’s announcement on Sunday that shipping routes via the Red Sea will resume.

Expectations that the US Federal Reserve might consider slowing down its aggressive interest rate hikes in the near future boosted investor sentiment, translating into increased demand for oil as a perceived hedge against economic slowdown. With inflation showing signs of easing, talks of potential rate cuts have gained traction, leading to an optimistic outlook for oil demand in the long run.

While oil prices climbed on Tuesday, the market remains volatile, with further gains hinging on developments in the Middle East and the Fed’s future monetary policy decisions. A resurgence of Houthi attacks or any unexpected slowdown in global economic growth could dampen the current bullish sentiment. Conversely, concrete signals of easing interest rates from the Fed could further bolster oil prices in the coming weeks.

In 1973, amidst the backdrop of the Yom Kippur War, the world experienced a seismic event: the Arab Oil Embargo. This calculated economic weapon, wielded by members of the Organization of Arab Petroleum Exporting Countries (OPEC), reshaped the global energy landscape, triggered economic turmoil, and cast a long shadow on international relations.

Arab OPEC members, led by King Faisal of Saudi Arabia, retaliated to Egypt and Syria’s surprise attack on Israel on October 6, 1973, by placing an oil embargo on countries that supported Israel, mainly the United States, the Netherlands, Portugal, and South Africa. Along with severe output reductions for other countries, the embargo included a complete prohibition on oil shipments to certain countries.

The embargo swiftly became painful for the globe, which was largely dependent on Arab oil. Within a year, the price of an oil barrel doubled, rising from $3 to about $12. Widespread energy shortages, fuel restrictions, and financial instability resulted from this. Industry collapsed, prices shot through the roof, and the 1960s worldwide economic boom came tumbling down.