Here's why oil prices have seen wild swings lately, clouding the outlook for inflation

• Crude oil prices have seen big swings in recent weeks due to production cuts and recession fears.
• Volatile oil prices cloud the outlook for inflation, putting the Fed in a position to keep monetary policy tight.

Oil prices have seen big movements recently, from talk last month of $100 a barrel right around the corner to prices hitting the brakes before retreating below $90 this month. The Israel-Hamas conflict that erupted on Saturday is just the latest driver in a market that's seen big volatility in 2023.

Both international and US crude prices spiked following the attacks by Hamas over the weekend, on fears that a wider conflict could pull in oil producers like Iran or even Saudi Arabia and threaten supply.

While conflict in a region home to many of the world's top oil producers is bound to cause prices to move, it is worth noting that 2023 has already been a particularly volatile year for the key energy commodity as countries continue to battle inflation and recession outlooks continue to shift.

Markets will be closely eyeing the latest moves in oil because an escalating conflict could mean more disruptions to output if major producers like Iran and Saudi Arabia are drawn in.

Higher oil prices are a bad sign for inflation as it drives up costs for so much of what people buy. While the Fed tends to use core inflation, which factors out food and energy prices, rising oil prices can trickle into other areas of the economy. Last month, the year-on-year CPI clocked in at 3.7%, well above the Fed's desired 2%.

As oil prices waffle, the outlook for what inflation looks like going forward becomes murkier.

Here's what's been moving crude prices in recent weeks.

Production cuts

In September, oil prices surged, with West Texas Intermediate crude touching $95 a barrel and Brent, the international benchmark, inching closer to the key $100 level.

The move was largely driven by supply constraints as Saudi Arabia and Russia aggressively slashed production to combat price "distortions" in the oil market.

The oil giants likely raked in close to $3 billion in profits as a result of the production cuts, and have vowed to keep output lower until November, holding steady at about 9 million barrels a day for six months, the lowest level in years.

Slowing demand

Sentiment changed last week. Fearing that soaring prices were pushing the market closer to demand destruction, Wall Street started to sound the alarm.

WTI crude prices fell by 11% from their most recent high around $95 to $84.57 a barrel on Wednesday last week.

News that Russia may lift its ban on diesel exports, and data from the Energy Department signalling weakening demand for gasoline, also sent prices lower.

"Demand destruction has begun (again)," JPMorgan's Natasha Kaneva said in a note last Wednesday, adding that "global oil stock draws have ended."

Israel-Hamas conflict

The picture changed again this weekend, this time on fears that fresh conflict in the Middle East would hurt global crude supply. Prices jumped on Monday after Hamas launched a surprise attack against Israel, kindling fears of a wider regional conflict.

Concerns that major producers like Iran and Saudi Arabia could be drawn into the conflict shook the oil market. Brent traded 4% higher at $88 a barrel, while WTI also jumped more than 4% to over $86 a barrel.