For bitcoin BTC$88,336.23 bulls, it feels like one setback after another. First precious metals like gold and silver surged to record highs, sucking capital away from the crypto market. And now oil's starting to surge too, threatening to skew macroeconomic forces in favor of bitcoin bears.

The per barrel price for the West Texas Intermediate (WTI) crude, a type of light, sweet crude from Texas fields serving as benchmark for North American energy pricing, has risen by 12% to $64.30 this month. That's the highest price since September. It's European and international benchmark, Brent, has seen a similar rise to $68.22.

This is bad news for bitcoin bulls counting on steady inflation and lower interest rates in the U.S. and other parts of the world to reignite the rally. Bitcoin peaked above $126,000 in early October and has since dropped to under $90,000.

Oil feeds into inflation

Oil is a key ingredient in everyday goods and services, so when its price rises, it raises costs across the board. Higher oil makes gasoline pricier raising transport costs for everything, including food deliveries, clothes, electronics and more. These costs are then passed on the final consumer, raising the general price level in the economy.

This, in turn, leads to workers asking higher wages to keep up with rising inflation, leading to a self-fulfilling cycle where salaries climb, companies then raise prices even more.

"We find that oil price pass-through to inflation is both economically and statistically significant, and that it occurs both directly and through second-round effects," Federal Reserve's explainer says. "Higher energy prices can also raise consumer and business expectations for future inflation, indirectly raising food and core prices now."

Central banks typically react to rising inflation by hiking borrowing costs, making credit and money pricier across the board, just as the Fed did in 2022 when it rapidly raised interest rates to tame inflation. Bitcoin fell by 64% that year, with the so-called Fed tightening playing a major role in destabilizing the asset.

The latest oil price upswing comes as the Fed grapples with fresh inflation worries. On Wednesday, the central bank kept interest rates unchanged in the target range of 4.5% to 4.75%, and said inflation remains “somewhat elevated” due to President Donald Trump's tariffs – taxes on goods imported from abroad.

According to ING, the accompanying statement and press conference suggested that the Fed is "more confidence that the policy easing cycle is close to a conclusion."

In other words, the Fed sees no rush to cut rates, and rising oil could firm up its stance against quick liquidity easing.

Why is oil rallying?

Fears of Trump striking Iran, a major oil producer, plus shrinking U.S. inventories are pushing oil prices higher.

In a Truth Social post Wednesday, Trump said that a massive Armada was headed towards Iran and made references to Venezuela, which the US military raided early this month. He asked Iran to make a deal on nuclear weapons or face a "far worse" U.S. attack.

Iran retaliated to Trump's threat by vowing to "respond like never before," while highlighting the human and economic cost of a potential U.S. adventure.

At the same time, the U.S. Energy Information Administration (EIA) data released Wednesday showed that oil inventories in the U.S. decreased by 2.3 million barrels during the week ended Jan. 24.

Dropping oil inventories typically signal stronger demand outpacing supply, where refineries pull more from stocks to meet needs.