Oil prices ease as Iran-Israel conflict enters sixth day

By Colleen Howe and Trixie Yap

(Reuters) -Oil prices eased in Asian trade on Wednesday, after a gain of 4% in the previous session, as markets weighed the chance of supply disruptions from the Iran-Israel conflict against a U.S. Federal Reserve rates decision that could impact oil demand.

Brent crude futures slipped 35 cents, or 0.5%, to $76.10 a barrel by 0723 GMT. U.S. West Texas Intermediate crude futures fell 23 cents, or 0.3%, to $74.61 per barrel.

Both had initially been up 0.3% to 0.5% in early trade.

U.S. President Donald Trump called for Iran's "unconditional surrender" on Tuesday.

Israel is running low on defensive "Arrow" missile interceptors, however, raising concerns about its ability to counter long-range ballistic missiles from Iran, the Wall Street Journal reported on Wednesday, citing an unidentified U.S. official.

Analysts said the market was largely worried about supply disruptions in the Strait of Hormuz, a conduit for a fifth of the world's seaborne oil.

Iran is OPEC's third-largest producer, extracting about 3.3 million barrels per day (bpd) of crude oil, but spare capacity among producers in the Organization of the Petroleum Exporting Countries and its allies can readily cover this.

"Material disruption to Iran's production or export infrastructure would add more upward pressure to prices," Fitch analysts said in a client note.

"However, even in the unlikely event that all Iranian exports are lost, they could be replaced by spare capacity from OPEC+ producers ... around 5.7 million barrels a day."

Meanwhile, some analysts stayed positive from a technical analysis standpoint.

There is a bullish stance on WTI in the near term due to rising geopolitical risk in the Middle East, said OANDA senior market analyst Kelvin Wong. This is in addition to a relatively low level of net long positioning in WTI futures among large speculators, he said.

Markets are also looking ahead to a second day of U.S. Federal Reserve discussions on Wednesday, in which the central bank is expected to leave its benchmark overnight interest rate in the range of 4.25% to 4.50%.

However, the conflict in the Middle East and the risk of slowing global growth could potentially push the Fed to cut rates by 25 basis points in July, sooner than the market's current expectation of September, said Tony Sycamore, market analyst with IG.

"The situation in the Middle East could become a catalyst for the Fed to sound more dovish, as it did following the October 7, 2023, Hamas attack," Sycamore said.

Lower interest rates generally boost economic growth and demand for oil.

Confounding the decision for the Fed, however, is the Middle East conflict's potential creation of a new source of inflation via surging oil prices.

Further, recent data showed the U.S. economy was slowing as Trump's erratic policymaking style fed uncertainty. [GLOB/MKTS]

(Reporting by Colleen Howe; Editing by Sonali Paul, Clarence Fernandez and Joe Bavier)