Oil prices settled lower on Wednesday as investors worried about possible US interest rate hikes and awaited updates on a high-stakes summit in Beijing between US President Donald Trump and China's Xi Jinping. Brent crude futures closed down $2.14, or 2%, to $105.63 a barrel, while US benchmark West Texas Intermediate (WTI) fell $1.16, or 1.14%, to $101.02. Boston Federal Reserve President Susan Collins said on Wednesday the US central bank may need to raise interest rates if inflation pressures do not abate, a sign that the war has begun to weigh on the US economy. Higher oil prices have pushed up fuel costs and economists expect to see effects in the months ahead. As per Reuters, the market remains highly reactive to every update from the region, meaning sharp swings are likely to persist.
US lawmakers pressed Pentagon chiefs for detailed information on mounting costs of America's ongoing war with Iran, as part of a hearing on the administration's unprecedented $1.5 trillion defense spending request for next year. According to reports from Business Standard, Defense Secretary Pete Hegseth declined to provide a breakdown of costs when questioned about the conflict in Congress. The Pentagon's acting comptroller Jules Hurst confirmed the war's estimated price tag has risen closer to $29 billion, up from a previously questioned $25 billion estimate that was considered unrealistically low.
President Donald Trump landed in Beijing on Wednesday, a day after saying he did not think he would need China's help to end the war, even as prospects for a lasting peace deal weakened and Tehran tightened its grip over the Strait of Hormuz. Trump is scheduled to meet Xi on Thursday and Friday for talks expected to focus on trade, Iran and broader geopolitical tensions. Trump predicted that inflationary impacts will be 'short-term' and said oil prices will come down after the war. Trump said on Tuesday he does not think he will need China's help to end the war with Iran, even as hopes for a lasting peace deal dwindled. The Trump-Xi meeting may influence trade and energy flows, with outcomes from the meeting potentially affecting demand expectations.
The Trump administration is draining America's emergency oil stockpile at the fastest pace on record, with the Strategic Petroleum Reserve plunging by 8.6 million barrels last week - the most on records that go back to the early 1980s. This leaves the SPR, the nation's emergency reserve of crude, at its lowest level since October 2024. According to federal data, crude inventories tumbled by 4.3 million barrels last week, while gasoline stockpiles dropped by nearly as much to the lowest level for this point on the calendar since 2014. "We're draining the tanks at a rapid rate. We're in a bad place going into summer driving season," said Bob Yawger, director of energy futures at Mizuho. Normally, storage builds heading into Memorial Day weekend ahead of the demand surge that accompanies the unofficial kickoff to summer. "The war could end tomorrow, and we don't have enough gasoline to super-size the market. We're not going back to $2.50-a-gallon gas anywhere in the US anytime soon," Yawger added.
Ten weeks into the war that began with US-Israeli attacks, a ceasefire has held for about a month but is under growing strain, as reported by Business Standard. Iran's Foreign Minister Abbas Araqchi said on Wednesday that Kuwait had "unlawfully" attacked an Iranian boat and detained four Iranian citizens in the Gulf. He added that Tehran demands their release and reserves the right to respond. US Vice President JD Vance said he believes progress is being made in negotiations with Iran to end hostilities, after Trump rejected Tehran's latest proposal as unacceptable. The length of the disruption and the scale of the supply loss - already more than 1 billion barrels - means oil prices are likely to remain above $80 per barrel for the rest of the year, according to Eurasia Group. As the Iran war continues, US crude oil inventories fell for a fourth straight week last week and distillate inventories also declined, according to market sources citing American Petroleum Institute data. Supply disruption fears still support prices near $100 per barrel, with the possibility of the strait reopening remaining unclear.
The prolonged conflict with Iran is beginning to weigh on the US economy, with rising oil prices driving up gasoline costs and raising concerns over broader economic repercussions in the coming months. US producer prices in April posted their biggest increase in four years, boosted by soaring costs for goods and services, the latest sign of accelerating inflation during the war with Iran. In April, US consumer prices rose sharply for a second straight month, resulting in the largest annual increase in inflation in nearly three years, with the Consumer Price Index (CPI) data pointing to mounting pressure from higher energy costs. The war with Iran has started to take its toll on the US economy, the world's biggest, as higher oil prices lead to more expensive fuels, and economists expect to see second-round effects in the months ahead. The latest inflation data has complicated the US Federal Reserve's policy outlook, reinforcing concerns that the central bank could maintain a more hawkish stance through the rest of the year.
