In the case of Bitcoin BTC$88,215.96 Bulls, it feels like setback after setback. First, precious metals like gold and silver soared to record highs, sucking capital out of the crypto market. And now, oil prices are starting to soar, 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 the Texas oil fields that is the benchmark for energy prices in North America, rose 12% this month to $64.30. This is the highest price since September. Brent, the European and international benchmark, similarly rose to $68.22.
This is bad news for Bitcoin bulls who are hoping stable inflation and lower interest rates in the US and other parts of the world will reignite the bull market. Bitcoin peaked at over $126,000 in early October, but has since fallen to below $90,000.
Oil leads to inflation
Oil is an essential ingredient for everyday goods and services, so higher prices will increase overall costs. High oil prices will increase gasoline prices, which will increase the cost of transporting everything from food delivery to clothing and electronics. These costs are passed on to final consumers, increasing the general price level in the economy.
This creates a self-fulfilling cycle in which workers demand higher wages to keep up with rising inflation, wages rise, and companies raise prices further.
“We find that the pass-through of oil prices to inflation is economically and statistically significant, and that it occurs through both direct and second-order effects,” the Fed explains. “Rising energy prices could raise consumer and business expectations for future inflation, indirectly increasing current food and core prices.”
Central banks typically respond to rising inflation by raising borrowing costs and raising the price of credit and money overall, much like when the Fed sharply raised interest rates in 2022 to curb inflation. That same year, Bitcoin fell 64%, with so-called Fed tightening playing a big role in destabilizing the asset.
The recent rise in oil prices comes as the Federal Reserve grapples with renewed inflation concerns. The central bank on Wednesday kept interest rates unchanged in its target range of 4.5% to 4.75%, saying inflation was still “slightly elevated” due to President Donald Trump’s tariffs.
Accompanying statements and press conferences suggested the Fed is “increasingly confident that the policy easing cycle is nearing its conclusion,” according to ING.
In other words, the Fed doesn’t see a need to cut rates in a hurry, and rising oil prices could strengthen its stance toward rapid liquidity easing.
Why are oil prices rising?
Concerns that President Trump will attack Iran, a major oil producer, as well as shrinking U.S. inventories are pushing up oil prices.
In a post on Truth Social on Wednesday, President Trump said a massive armada was headed toward Iran, referring to Venezuela, which was raided by U.S. forces earlier this month. He called on Iran to reach a deal on its nuclear weapons or face a “much worse” attack by the United States.
Iran has retaliated against Trump’s threats, vowing an “unprecedented response” while highlighting the human and economic costs of a potential U.S. adventure.
At the same time, U.S. Energy Information Administration (EIA) data released Wednesday showed U.S. oil inventories fell by 2.3 million barrels in the week ending Jan. 24.
Declining oil inventories usually indicate that demand exceeds supply, and refineries are pulling more oil from their inventories to meet their needs.