Oil prices pulled back but remained elevated ahead of a critical Fed decision on Wednesday, with market expectations shifting towards a prolonged US-Iran conflict. Brent crude for November delivery fell 2.88% at 2:18 p.m. ET, to trade at $105.6 per barrel, while WTI crude for October delivery declined 3.33% to change hands at $102.3/bbl. The Federal Reserve raised interest rates by 25 basis points on Wednesday to a range of 3.75% to 4.00%, its first rate hike since 2023, as policymakers responded to renewed inflationary pressure. Fed officials also projected one additional rate increase before the end of the year. Higher interest rates generally act as a headwind on oil prices by cooling economic activity, boosting the value of the U.S. dollar and raising the cost of holding crude inventories. However, commodity analysts at Standard Chartered have predicted that the continuing US-Iran stalemate and increasing associated physical risks to regional exports will keep oil prices supported above a higher floor.
The planned diplomatic meeting between Iran and Gulf Arab states regarding commercial shipping through the Strait of Hormuz was postponed on Tuesday, amid a lack of Arab consensus, dashing that near-term hope for a de-escalation.
Last week, Iran-aligned Houthi forces in Yemen seized the strategic Red Sea port of Mocha and launched heavy drone and missile strikes against Saudi Arabia's King Khalid Air Base. Tensions spiked further after a drone strike from Iraq damaged a key pumping station on Saudi Arabia's East-West oil pipeline near Riyadh and Medina. Bahrain had already announced it would boycott the forum, saying regional security "cannot be preserved through a policy of appeasement" and citing the pipeline strike as proof that attacks on Gulf infrastructure remained an active threat. Saudi Arabia, whose own objections to the proposed wording of the meeting drove Oman to postpone it, did not attend either.
Drone attacks have forced Saudi Arabia to shut its East-West crude pipeline, an important alternative export route that bypasses Hormuz.
According to StanChart, the damage to the pipeline materially raises the near-term risk to crude exports, with the key bypass route to Yanbu now expected to remain largely out of service for several weeks. StanChart estimates that Saudi Arabia has only around one week of crude stocks at its ports to sustain exports at current rates, meaning a prolonged outage could force greater reliance on already-constrained routes through Hormuz and put a significant volume of export supply at risk. At the same time, the Houthi advance along Yemen’s Red Sea coast and around Bab el-Mandeb increases the risk to tanker transit through the Red Sea, potentially adding further war-risk insurance, freight and rerouting costs. The immediate implication is, therefore, not simply less crude availability, but a higher cost and lower reliability of moving Gulf barrels to market.
Additionally, StanChart says the disruption exposes a deeper weakness in the market’s assumed supply optionality. The East-West pipeline was explicitly part of the solution to Hormuz
By Alex Kimani for Oilprice.com
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