Oil Prices Hold Above $90 as Iran War Premium Persists Despite Ceasefire

(P1) Oil prices are holding firm above $90 a barrel, reflecting a persistent war-risk premium as the U.S.-Iran conflict enters its eighth week, even as a recent ceasefire has cooled prices from their April peak of $115. The ongoing uncertainty is keeping global energy markets on edge, with West Texas Intermediate crude trading near $91 a barrel after a volatile session.

(P2) "It's going to gouge out some of the growth, but we'll weather through it," said Mike Skordeles, head of U.S. economics at Truist Advisory Services. "The bigger issue is the uncertainty."

(P3) The war's impact is most visible in inflation data, with the headline Consumer Price Index rising 0.9 percent in March, pushing the annual rate to 3.3 percent. While core inflation remains more subdued, rising just 0.2 percent, the New York Fed’s Global Supply Chain Pressure Index in March surged to its highest level since January 2023, indicating that price pressures are still building.

(P4) The key risk for the global economy is an escalation that pushes oil prices toward demand-destruction levels. Joseph Brusuelas, chief economist at RSM, identified $125 a barrel for WTI as the threshold where "it becomes more of an economic problem." For now, the market is walking a tightrope between a fragile peace and the potential for a wider conflict that could remove over 1.5 million barrels per day of Iranian crude from the market.

Congress Vote Extends Uncertainty

Fears of a prolonged conflict were renewed after the U.S. House of Representatives narrowly rejected a resolution to withdraw American forces from Iran. The vote, which followed a similar result in the Senate, signals continued U.S. military involvement, solidifying the war risk premium in oil markets. Analysts at Standard Chartered project the U.S. counter-blockade could remove an additional 1.5 to 1.8 million barrels per day of Iranian crude, primarily destined for China. This has steepened the front-month Brent contract's premium over deferred contracts, a market structure known as backwardation, indicating traders are paying a premium for immediate supply.

Inflation and the Fed's Dilemma

The conflict has created a significant challenge for the Federal Reserve. Soaring energy costs are feeding into headline inflation, with U.S. import prices rising 2.1 percent in the 12 months through March, the largest increase since December 2024. This complicates the Fed's ability to consider interest rate cuts that many analysts expected before the war. Goldman Sachs recently cut its 2026 GDP forecast by half a percentage point to 2 percent, but still expects the Fed to deliver two rate cuts later this year, in September and December, as weaker growth eventually translates into a higher unemployment rate. However, with the Fed's benchmark rate in a 3.50%-3.75% range, persistent inflation could force policymakers to delay any easing, keeping borrowing costs elevated for consumers and businesses.

This article is for informational purposes only and does not constitute investment advice.