Oil surges as U.S.-Saudi strikes on Iraq roil markets ahead of Fed

Crude oil prices jumped more than 4% on Wednesday as joint U.S. and Saudi military strikes on Iran-backed groups in Iraq reignited fears of a wider Middle East conflict, pushing Treasury yields higher just hours before the Federal Reserve's rate decision.

Geopolitical Shock Lifts Energy Prices

Brent crude futures rose roughly 4.4% to $87.81 a barrel, while U.S. West Texas Intermediate gained about 4.3% to $82.69, according to Reuters, extending a rally driven by mounting geopolitical risk in the Gulf region. The strikes came after the U.S. military said it had intercepted an attempted Iranian ballistic missile attack targeting American forces, and Washington and Riyadh blamed Iran-backed militias for drone attacks on Saudi oil facilities.tradingview+2

The escalation raised fresh concerns about shipping through the Strait of Hormuz, which carries approximately one-fifth of global oil consumption. Tehran rejected an Omani proposal for joint regional management of the waterway, dashing hopes for a diplomatic breakthrough. "Renewed military strikes in the Middle East and Iranian officials reiterating that they want to control shipping activity through the Strait of Hormuz amid depressed oil flows are lifting oil prices again," said UBS analyst Giovanni Staunovo.tekedia

Treasury Yields Climb Ahead of Fed

The oil spike rippled through bond markets. The benchmark 10-year Treasury yield rose 1.2 basis points to 4.616%, while the 2-year yield, which closely tracks monetary policy expectations, climbed 2.4 basis points to 4.301%, snapping a three-day streak of declines, according to Reuters. Indian government bonds also slipped as rising crude threatened the country's inflation outlook, and euro zone bond markets saw their recent rally stall.economictimes+1

The Federal Reserve is widely expected to hold rates steady at its meeting Wednesday, but CME FedWatch ↗ 0.21% data showed traders pricing a roughly 32% chance of a surprise 25-basis-point hike — the most uncertainty going into a Fed meeting since December 2018, according to Deutsche Bank ↘ 0.89% global head of macro research Jim Reid.finimize+1

Inflation Outlook Complicates Fed Calculus

The resurgence in energy prices presents a fresh challenge for Fed Chair Kevin Warsh. Although U.S. consumer inflation eased unexpectedly in June, sustained oil price increases risk slowing progress toward the Fed's 2% target. Traders are fully pricing in a September rate hike, along with a 71.2% chance of an additional hike by year-end.economictimes+1

Still, BCA Research analysts argued that "peak hawkishness is behind us," noting the labor market is cooling and longer-term inflation expectations remain anchored. The June Personal Consumption Expenditures Price Index, the Fed's preferred inflation gauge, is due Thursday alongside a second-quarter GDP reading — data that could reshape the rate outlook depending on whether the oil-driven price pressures prove transitory or persistent.finimize+1