Brent climbs on escalating Middle East hostilities

Brent crude oil futures surged above $77 per barrel on Thursday, reaching an over four-month high, driven by a sharp escalation in geopolitical risks within the Middle East.

Market anxiety intensified after reports indicated that Israel attacked Iran’s Arak heavy water reactor early Thursday morning. This strike followed Israeli President Isaac Herzog's explicit statement about the imperative of dismantling Iran's nuclear program.

The Arak heavy water reactor is a significant concern from a proliferation standpoint as it can produce plutonium, a material that can be used to develop nuclear weapons, offering Iran an alternative path to a bomb beyond enriched uranium.

Adding further fuel to the fire, senior US officials are reportedly preparing for a possible strike on Iran in the coming days, signaling Washington’s readiness for potential direct involvement in the conflict. However, mixed signals persist, as the White House has offered little clear indication of whether the US would support strikes specifically targeting Tehran’s nuclear facilities.

The paramount concern for the global oil market remains the Strait of Hormuz, a narrow, critical chokepoint through which approximately one-fifth of the world's total crude oil supply, and a significant portion of liquefied natural gas, transits daily. Any major disruption to this vital shipping lane due to escalating hostilities could have severe implications for global energy supplies and prices.

Separately, providing a counterpoint that could offer some future support to demand, the US Federal Reserve kept interest rates steady on Wednesday. However, the central bank signaled the possibility of two rate cuts by year-end. Such a dovish shift in monetary policy, if realized, could potentially stimulate economic growth and subsequently boost global oil demand, acting as a supportive factor against the backdrop of supply-side concerns driven by geopolitical tensions.

The oil market is thus caught between the immediate fear of supply disruptions from the Middle East and the longer-term prospect of increased demand from potentially looser monetary policies.

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