Oil extends rally as Middle East tensions reignite supply concerns

Oil prices pushed sharply higher on Wednesday, extending their rebound as renewed geopolitical tensions in the Middle East overshadowed concerns about demand and shifted investors' attention back to potential supply disruptions.

As of 1:13 PM GMT, Brent crude futures were trading around $89.82 per barrel, up approximately 6.8% on the day, while US West Texas Intermediate (WTI) crude climbed to about $84.11 per barrel, gaining roughly 6.1%, as traders rapidly priced in a larger geopolitical risk premium following the latest escalation in the Middle East.

Geopolitical risk returns to the forefront

The latest surge follows a sharp escalation in regional tensions after Iran launched a ballistic missile attack targeting US forces in the Middle East. The attack came after US and Saudi strikes against Iran-backed armed groups in Iraq, reigniting fears that the conflict could threaten oil flows through key shipping routes.

Although no major supply disruption has occurred so far, traders were quick to price in a higher geopolitical risk premium given the strategic importance of the Strait of Hormuz and the Bab el-Mandeb corridor, two of the world's most critical energy transit chokepoints.

Supply outlook adds further support

Beyond the geopolitical backdrop, prices also drew support from fresh signs of tightening US crude supplies. Industry data showed US crude inventories fell by roughly 3.3 million barrels last week, reinforcing expectations of a tighter physical market.

Meanwhile, reports that OPEC+ is likely to halt further production increases after September have added another bullish factor, suggesting the producer group could prioritize market stability if geopolitical risks continue to escalate.

Markets await the Fed

Despite the strong rally, investors remain cautious ahead of the Federal Reserve's policy decision later in the day. While the central bank is widely expected to leave interest rates unchanged, traders will closely watch its economic outlook for clues on future policy.

A more hawkish Federal Reserve could strengthen the US dollar and weigh on commodity prices in the coming sessions. For now, however, concerns over Middle East supply risks are proving to be the dominant force, allowing oil to recover a significant portion of the steep losses recorded earlier this week.