Oil Prices Drop Sharply Amid Iran-Israel Ceasefire Agreement and Fed Policy Watch

Crude Oil Prices Fall on Middle East Peace Talks

Global crude oil prices slumped significantly as markets reacted to news of a potential ceasefire between Iran and Israel, easing fears of a prolonged conflict in the Middle East. Former U.S. President Donald Trump announced that both countries had agreed to a “complete and total” ceasefire, with Iran beginning the truce immediately and Israel expected to follow within 12 hours. If the ceasefire holds for 24 hours, Trump claimed, the current hostilities could come to an end.

The announcement followed a limited military strike by Iran on a U.S. base in Qatar, which caused no reported casualties. Trump referred to the attack as a “very weak response” to recent American airstrikes on Iranian nuclear infrastructure.

Middle East Tensions Ease, Pushing Oil Prices Lower

Following the news, Brent crude and WTI crude oil futures dropped as investor fears of supply disruption lessened. Markets were particularly relieved that Iran chose not to target oil tankers in the Strait of Hormuz, a critical oil shipping route.

However, uncertainty lingers as Israel has signalled intentions to retaliate after alleging missile attacks from Iran—claims that Iran has denied, stating it remains committed to the ceasefire.

Geopolitical Risk Still Focused on the Strait of Hormuz

The Strait of Hormuz, a vital chokepoint for global oil shipments, remains in sharp focus. Roughly 18 to 19 million barrels per day of oil pass through the narrow strait, which accounts for nearly 20% of the world’s oil supply.

Analysts from ING warned that any blockade of the Strait would severely tighten global oil markets. “Even if OPEC’s spare capacity is tapped, most of it still needs to move through Hormuz,” they noted. A successful disruption could see Brent oil prices spike to $120 per barrel, with a sustained outage pushing prices beyond $150 per barrel, potentially setting new record highs.

Oil Market Outlook Improves as Diplomatic Solutions Emerge

Tuesday’s decline in oil futures extended the sharp losses seen on Monday, as hopes for a peaceful resolution to the Iran-Israel conflict gained momentum. Tehran’s muted response and the absence of casualties have provided some reassurance to traders that a wider conflict may be avoided.

Investors Eye U.S. Federal Reserve Policy as Powell Testifies

Outside of geopolitical concerns, investors are turning their attention to Federal Reserve Chair Jerome Powell, who is scheduled to testify before Congress this week. Powell is expected to face questions over the Fed’s recent decision to hold interest rates steady and its cautious approach amid ongoing economic uncertainty.

Trump has publicly criticised Powell and the Fed, calling for aggressive interest rate cuts of "two to three points" to stimulate the U.S. economy. Trump warned that maintaining high borrowing costs could hurt American consumers and businesses.

Any move by the Fed to lower interest rates would likely provide a boost to the U.S. economy, which is also the world’s largest consumer of energy—potentially influencing future oil demand forecasts.

(Sources: investing.com, ChatGPT)