For Bitcoin bulls, it seems like one setback after another. Early precious metals like gold and silver have hit record highs, draining capital from the crypto market. And now oil is also starting to rise, threatening to skew macroeconomic forces in favor of Bitcoin bears.
The price of a barrel of West Texas Intermediate (WTI) crude, a type of light, sweet crude from Texas fields that serves as a benchmark for energy prices in North America, rose 12% to $64.30 this month. This is the highest price since September. Its European and international benchmark, Brent, saw a similar increase to $68.22.
This is bad news for Bitcoin bulls who are counting on stable inflation and lower interest rates in the United States and other parts of the world to jumpstart the recovery. Bitcoin peaked above $126,000 in early October and has since fallen below $90,000.
Oil fuels inflation
Oil is a key ingredient in everyday goods and services. So when its price increases, costs increase across the board. Rising oil makes gasoline more expensive, increasing transportation costs for everything, including deliveries of food, clothing, electronics and more. These costs are then passed on to the end consumer, thereby increasing the general price level in the economy.
This, in turn, leads workers to demand higher wages to keep up with rising inflation, leading to a self-fulfilling cycle in which wages rise, with companies then raising prices even more.
“We find that the pass-through of oil prices to inflation is both economically and statistically significant, and that it occurs both directly and through second-round effects,” says the Federal Reserve’s explanation. “Rising energy prices may also increase consumer and business expectations of future inflation, indirectly raising prices for food and basic goods now.”
Central banks typically respond to rising inflation by raising borrowing costs, making credit and money more expensive across the board, just as the Fed did in 2022 when it quickly raised interest rates to bring inflation under control. Bitcoin fell 64% that year, with so-called Fed tightening playing a major role in destabilizing the asset.
The latest rise in oil prices comes as the Fed grapples with new inflation concerns. The central bank on Wednesday kept interest rates unchanged within the target range of 4.5% to 4.75%, and said inflation remained “somewhat elevated” due to President Donald Trump’s tariffs – taxes on goods imported from abroad.
According to ING, the statement and accompanying press conference suggest that the Fed is “more confident that the policy easing cycle is nearing its conclusion.”
In other words, the Fed sees no urgency to cut rates, and rising oil could strengthen its position against rapid liquidity easing.
Why is oil rebounding?
Fears that Trump will strike Iran, a major oil producer, as well as dwindling U.S. inventories are pushing oil prices higher.
In an article published Wednesday by Truth Social, Trump said a massive Armada was heading toward Iran and referenced Venezuela, where the U.S. military attacked earlier this month. He called on Iran to strike a nuclear weapons deal or face a “much worse” U.S. attack.
Iran responded to Trump’s threat by pledging to “respond like never before”, while emphasizing the human and economic cost of a possible US adventure.
Meanwhile, Energy Information Administration (EIA) data released Wednesday showed U.S. oil inventories fell by 2.3 million barrels in the week ended Jan. 24.
Declining oil inventories are generally a sign of stronger demand outstripping supply, with refineries drawing more on their inventories to meet needs.
