Oil prices experienced a dramatic reversal as benchmark U.S. crude oil plunged 16.4% to settle at $94.41 per barrel, while Brent crude tumbled 13.3% to $94.75 per barrel following the announcement of a two-week ceasefire deal. The price decline represents a significant recovery from earlier highs when oil prices had briefly topped $119 during the height of war concerns. However, analysts note that oil prices remain above their roughly $70 price level from before the war, indicating that while the immediate threat has eased, the underlying geopolitical tensions continue to support elevated energy costs. Iran closed the Strait of Hormuz again Wednesday in response to Israeli attacks against the Hezbollah militant group in Lebanon, highlighting the ongoing vulnerability of Middle East energy flows.
The oil price decline has significantly shifted market expectations for Federal Reserve policy, with CME Group data showing a nearly 24% chance that the Fed could resume its cuts to rates in 2026. This represents a dramatic shift from earlier in the week when traders were pricing in the possibility of Fed rate hikes to combat oil-shock-induced inflation. Treasury yields dropped as hopes built that easing oil prices could let the Federal Reserve resume its cuts to interest rates later this year, with the 10-year Treasury yield falling to 4.29% from 4.33% late Tuesday. Lower Treasury yields provide a boost to prices for stocks, bonds and other investments, while also easing recent rises in mortgage and loan rates for U.S. households and businesses. Swaps indicate a 41.6% probability of a Fed rate cut by year-end, compared with almost no chance at the start of the week.
The oil price decline triggered a worldwide market rally, with Asian markets leading the surge as South Korea's Kospi index surged 6.9%, Japan's Nikkei 225 leaped 5.4%, and Hong Kong's Hang Seng jumped 3.1%. European markets followed suit with Germany's DAX returning 5.1% and France's CAC 40 rallying 4.5%. On Wall Street, companies with significant fuel costs experienced substantial gains, with United Airlines soaring 7.9% and cutting into its yearly loss of 20.1%, while Cruise ship operator Carnival climbed 9.6% and Delta Air Lines rallied 4.2% after reporting stronger quarterly results than analysts expected. CEO Ed Bastian noted that demand for flights remains strong and the company is making moves to offset higher fuel costs, including raising bag-checking fees.
Federal Reserve officials continue to signal no urgency for rate adjustments as economic data and geopolitical developments shape their outlook. New York Fed President John Williams stated that his outlook for underlying price pressures in the US remained largely unchanged, even as he expects higher energy costs from the Middle East conflict to lift overall inflation. Williams emphasized 'Monetary policy is exactly where it needs to be, and then we can respond if the situation changes' and noted there was no need to consider any adjustment to the Fed's benchmark interest rate. Similarly, Chicago Fed President Austan Goolsbee acknowledged that the surge in oil prices, along with weak hiring by businesses, heightens concerns about the US economy, but maintained a measured approach to policy changes. The latest oil price developments provide additional support for the Fed's current accommodative stance.
San Francisco Federal Reserve President Mary Daly has signalled confidence in the resilience of the U.S. economy, even as geopolitical tensions and elevated oil prices cloud the near-term outlook. Speaking on Wednesday, Daly said the economy remains on a strong footing, with consumer spending and business investment continuing to hold up despite the uncertainty triggered by the Iran conflict. Her remarks suggest that, for now, domestic economic momentum has not been derailed by external shocks. The recent surge in oil prices—sparked by the conflict—has raised concerns about a potential resurgence in inflation, but Daly's comments indicate a cautious stance. While she acknowledged the risks posed by higher energy costs, she emphasised that inflation control remains the Federal Reserve's primary focus, with her assessment of a stable labour market further suggesting there is no immediate urgency to shift toward policy easing. The evolving situation in the Middle East remains a key variable, with Daly highlighting that the duration of the conflict and the trajectory of oil and gas prices will play a crucial role in shaping the economic outlook.
