Oil prices rose sharply on Thursday, climbing nearly 2%, as the Federal Reserve's unexpected rate cut and escalating tensions in the Middle East fueled market gains. The U.S. central bank's decision to cut interest rates by half a percentage point-the largest cut in over four years-helped global benchmark Brent crude recover from its recent lows. Brent futures rose to $74.79 a barrel, up $1.17, while U.S. crude jumped 1.7%, trading at $72.08 a barrel by mid-afternoon.
The Federal Reserve's rate cut, seen as an attempt to stimulate the slowing U.S. economy, provided a lift to oil prices by boosting expectations of increased economic activity and energy demand. However, some analysts noted that the rate cut also reflects a weakening U.S. labor market, which could temper future gains. "The Fed cut appears to be shaking out some hedge fund shorts from their bearish oil obsession," said Phil Flynn, senior market analyst at the Price Futures Group.
While the rate cut was a significant factor in oil's rebound, rising geopolitical tensions in the Middle East also contributed to the market's upward momentum. Israel and Hezbollah, the Iranian-backed militia group based in Lebanon, have seen an escalation in their conflict, with Israeli strikes targeting Hezbollah positions in southern Lebanon following a series of deadly explosions involving the group's communications devices.
Crude prices have also been buoyed by a continued decline in U.S. oil stockpiles, which fell by 1.6 million barrels last week to their lowest level in a year, according to government data. UBS analysts projected that falling global stockpiles would push Brent prices above $80 a barrel in the coming months. A counter-seasonal oil market deficit of approximately 400,000 barrels per day is expected to support prices in the $70-$75 range throughout the next quarter, according to Citi analysts.
At the same time, disruptions to oil exports from the U.S. Gulf Coast caused by Hurricane Francine have started to ease, with analysts from Macquarie predicting a significant rebound in exports next week. These factors combined to support the recovery in oil prices after recent declines, with Brent hitting its lowest point in nearly three years just last week, falling below $69 a barrel.
Tensions between Israel and Hezbollah remain a critical driver of oil market volatility. On Thursday, Israeli warplanes carried out strikes in southern Lebanon following explosions of walkie-talkies and pagers used by Hezbollah that killed dozens and injured thousands. U.S. officials have attributed the attacks to Israeli intelligence, though Israel has not publicly claimed responsibility.
Israeli Defense Minister Yoav Gallant confirmed a strategic shift in focus from Gaza to the northern border with Lebanon, as the conflict with Hezbollah intensifies. "Our attention is now on Lebanon," Gallant said, adding that approximately 60,000 Israelis have been evacuated from the area as a new phase of the war begins.
The risk of broader regional conflict has raised concerns among oil market analysts that OPEC member Iran could become directly involved. "We continue to highlight Lebanon as the main pathway to oil disruption through direct Iranian involvement in a wider regional war," said Helima Croft, head of global commodity strategy at RBC Capital Markets. An escalation in the conflict involving Iran, one of the world's largest oil producers, could significantly impact global oil supplies.
Despite the bullish momentum in the market, some factors are holding back further gains. Weak demand from China, the world's largest importer of crude oil, has tempered the price rally. China's industrial output growth slowed to a five-month low in August, and refinery output also fell for the fifth consecutive month, according to recent data from the country's statistics bureau. Retail sales and home prices in China have also shown signs of weakness, limiting upward pressure on oil prices.
Nevertheless, crude oil prices remain on a steady upward trajectory as global markets respond to a mix of economic policy decisions and geopolitical developments. Analysts expect the Federal Reserve's rate cut to continue supporting energy demand in the near term, while the volatile situation in the Middle East could add further pressure on global oil supplies.
