Oil Prices Slip in Asian Trade | Iran-Israel Conflict and Fed Rate Cut Speculation in Focus

(Reuters) Oil prices fell during Asian trading on June 18 after a 4% gain the previous day. While geopolitical risks in the Middle East are intensifying, concerns are rising that the Federal Reserve's interest rate policy could dampen oil demand.

[Background] Brent and WTI Decline After Previous Day’s Rally

As of 6:20 a.m. JST on June 18, Brent crude futures were trading at $75.96 per barrel (-0.6% from the previous day), and WTI crude futures were at $74.46 (-0.5%). Both benchmarks were up 0.3%–0.5% in early trading before slipping back.

The movement is seen as a result of simultaneous pressure from escalating military tensions between Iran and Israel and uncertainty over U.S. interest rate policy.

[Key Point 1] Iran-Israel Military Conflict Threatens Oil Supply

On the sixth day of mutual airstrikes between Iran and Israel, former U.S. President Donald Trump demanded Iran’s “unconditional surrender.” The U.S. Department of Defense has deployed additional fighter aircraft to the Middle East, further raising regional tensions.

Particularly concerning is the safety of the Strait of Hormuz, a crucial oil shipping lane through which about 20% of the world’s seaborne crude oil passes. Fears of a blockade or attack are spreading in the market.

Additionally, the Wall Street Journal reported that Israel is running low on its stockpile of "Arrow" long-range missile interceptors, raising questions about the sustainability of its defense posture.

[Key Point 2] OPEC+ Spare Capacity Expected to Contain Price Rise

On the other hand, a factor helping to ease supply fears is the spare production capacity of OPEC member countries and other OPEC+ nations such as Russia.

Iran is the third-largest producer within OPEC, producing approximately 3.3 million barrels per day. According to Fitch Ratings, even in the event of a complete halt of Iranian exports, the combined spare capacity of OPEC+—around 5.7 million barrels per day—can compensate for the loss.

Fitch estimates that the geopolitical risk premium in crude prices is likely to remain around $5–$10 per barrel under these conditions.

[Key Point 3] Fed Policy and Oil Demand Outlook

Markets expect the U.S. Federal Reserve to hold interest rates steady at 4.25%–4.50% at its policy meeting on June 18. However, concerns over the global economic outlook, exacerbated by the Iran crisis, may prompt a rate cut.

Tony Sycamore, an analyst at IG Securities, said, “Instability in the Middle East could be a catalyst for the Fed to adopt a more dovish stance, similar to its response after the Hamas attack on Israel on October 7, 2023.”

Some market participants believe the rate cut initially expected in September could be brought forward to July, with a potential 25 basis point reduction.

[Conclusion] Geopolitical and Monetary Forces in Tug of War

The oil market is currently caught between supply-side risks stemming from the Iran-Israel conflict and demand-side risks related to U.S. monetary policy. The direction of prices will largely depend on developments in the Strait of Hormuz and the Fed’s policy shifts.

For investors and traders, heightened short-term volatility requires flexible position management and attention to global events.

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