Geopolitics and oil markets are treading what is by now becoming a familiar pattern. Over the weekend, US President Donald Trump announced that he’d suspended planned airstrikes against Iran and negotiations had restarted. Iran claimed there were not plans for talks, but did not launch any attacks of their own.
The stock market rallied, and crude prices dipped by over $5 at the Monday open. There was plenty of talk about optimism that a deal to reopen Hormuz could be reached. However, the reaction was more muted compared to prior announcements, amid an apparent loss of credibility. Traders have seen this exact scenario several times before.
Credibility Bump, But Time Is Running Out
Crude prices started to trend higher as there were no signs of progress on Monday, but then US Treasury Secretary Scott Bessent said that a deal to open the Strait was likely on Tuesday or Wednesday. Markets moved again, likely an indication that traders found him more credible. Also, the API report came out showing a build of US inventories, suggesting that supply was not as overstretched as initially thought.
However, there has yet to be an announcement of a deal, and from past experience, crude prices are likely to rise amid a resumption of the war. Trump announced that a deal could be reached by Thursday, extending the runway a little. However, even if attacks aren’t resumed, the price of crude could continue to drift higher as investors hedge that the Strait will not reopen soon.
Transit Remains Suspended, Inflation Unchecked
In the last 24hrs, just twelve ships have managed to cross the Strait according to trackers, which is a tenth of the normal volume. Five of those ships were carrying crude. While the focus has been on energy, other key products also are produced in the Persian Gulf, including petrochemicals and fertilizer.
Higher prices in these elements are also pushing up inflation pressures, keeping central banks inclined to hike. Higher rates would weigh on precious metals like gold. The yellow metal has trended higher amid easing geopolitical tensions, and could be more senstitive to the situation than currencies. With the Strait still closed, but attacks not restarting, the dollar has generally weakened a little, as the odds of a September rate hike by the Fed decline modestly.
Crude Outlook Speculative
Brent and WTI are still both higher than at the start of the wear despite a drop in global demand. US exports of crude dropped last year, due to the partial reopening of the Strait, which was later closed. This showed markets that demand is not hugely out of balance, which could indicate that substantially higher prices are not justified, even if the war goes on for months.
On the other hand, markets clearly do not believe a resolution of the conflict will happen soon, and the higher prices represent a hedge against uncertainty. Uncertainty is speculative, meaning that the price will likely be resolved quickly if there is certainty, keeping oil prices fairly volatile, but potentially range-bound. Gold, on the other hand, could continue to climb higher unless attacks resume.
