Oil Prices Drop 4.9%: Why the Fed’s Rate Hike or Cut Decision Is Problematic

International oil prices continued to decline after trading opened on the morning of July 26, Eastern Time, moving further away from the nearly two-month high reached last week. The market's tension eased slightly as the U.S. and Iran refrained from military attacks in the Persian Gulf for a second consecutive day. Brent crude futures for September delivery dropped 4.9% shortly after trading resumed, settling at $92.02 per barrel. This decline extended Friday’s 3.9% drop. Last week, Brent crude briefly touched $102 per barrel, about $30 higher than the most active contract price at the beginning of the month, marking its highest level since May. Multiple Saudi Arabian oil tankers attacked in the Red Sea Oil prices surged this month, primarily due to escalating conflicts in the Middle East and market fears that a full-scale war could further disrupt global oil supply. Since the U.S. and Israel launched attacks on Iran at the end of February, the safety of navigation through the Strait of Hormuz has become a focal point in the oil market. This narrow waterway along Iran’s coast normally carries about one-fifth of the world’s crude oil exports, but shipping has been significantly disrupted since the conflict began. Oil-producing nations have sought alternative shipping routes, but these paths are also under pressure. Last week, multiple Saudi Arabian oil tankers using the Red Sea to leave the Middle East were attacked. Reduced oil supply pushed prices higher, leading to increased fuel costs. According to data from the American Automobile Association (AAA), the national average retail price for regular gasoline in the U.S. was $4.11 per gallon on July 26, up from $3.90 a month earlier and significantly higher than $3.15 a year ago. If oil prices remain elevated, they will increase global shipping, land transport, and air freight costs, affecting prices of various goods, including food. Rate hike or cut? The Federal Reserve faces a dilemma While the U.S. economy continues to grow, the conflict with Iran has dampened consumer confidence. This month’s renewed acceleration in oil prices coincides with inflation cooling more than economists had expected. Traders now believe inflationary pressures have returned. According to data from the CME Group, the market estimates a 36% probability that the Federal Reserve will raise interest rates at its next meeting. Raising interest rates helps curb inflation but increases borrowing costs for businesses and individuals, potentially slowing economic momentum. U.S. long-term mortgage rates have risen to their highest level in nearly a year, cooling the housing market. Higher borrowing costs could also slow the construction boom of AI data centers, an investment that has become a key driver of U.S. economic growth. West Texas Intermediate crude futures for September delivery fell 5.6% on July 26 to $84.34 per barrel, following a 3.1% drop on July 24. The most actively traded October Brent crude contract fell 4.6% to $87.48 per barrel. Editor: Hsu Yung-hsiang More exclusive news from Feng Media: • Oil-producing giants turning to nuclear: Why the Saudi-U.S. nuclear deal alarms Israel and Japan • New Delhi issues a 'Hormuz Strait navigation ban'—278,000 sign petition urging Indian government to decide on military escort • 20% escort fee waived: Trump announces major Gulf investment deals with the U.S., while simultaneously striking multiple locations in Iran