Oil futures are falling by nearly 2% for both and , which are pulling back from their highest levels in over 40 days.
The decline in oil prices comes despite the ongoing escalation in the Middle East, with no prospects for reaching a broader understanding to halt the escalation and end the war. On the other hand, the rapid surge in oil and refined product prices and bond yields, and the fall in the stock market, could push President Donald Trump to pursue a temporary de-escalation, as he has done on several previous occasions.
The United States has completed 13 nights of extensive strikes against Iran, while the Strait of Hormuz remains closed, with only one ship passing through yesterday according to Kpler data reported by Reuters. Meanwhile, rounds of conflict extending since late February do not appear to have substantially neutralized Iranian capabilities to prevent them from launching missiles and drones, threatening navigation in the region, or targeting energy infrastructure. Iran managed to rebuild infrastructure, whether related to missiles and their facilities, or restoring inventories, ports, and bridges, according to a Wall Street Journal report citing former Israeli and Western officials and military leaders, which raised their concerns about the effectiveness of this campaign that involved more than 20,000 strikes. This is likely to prolong the escalation timeframe, potentially exposing the risks of continued rising oil prices, and to worsen the risk of expanding targeting of energy infrastructure in the region, as the possibility of the Houthis in Yemen cementing their role in the war substantially increases.
On the other hand, even with the apparent escalation factors currently present, I do not rule out the possibility of a sudden Trump announcement de-escalating the situation in some way. This could be a halt to strikes to make room for diplomacy, or he might go so far as to say that the Iranians decided to return to negotiations and begged to stop the strikes, or something of that sort. This is because West Texas crude crossing the 90 dollars per barrel threshold in the futures market, and a gallon of gasoline crossing the 4 dollars threshold at the pump on average (per AAA Fuel Prices), alongside intensifying sell-offs in Treasury bonds and the decline in the stock market in light of factors concerning artificial intelligence and Chinese competition, could push Trump to take a breather in an effort to redirect the market to what he wants, even temporarily.
The US market is Trump’s most important vulnerability, especially the Treasury market. We saw in the past, amid the trade war with China, how Trump backed down from escalation when sell-offs in Treasury bonds intensified. Today, stands at nearly 4.7 percent, which is the highest since January of last year.
Nevertheless, even if we witness a surprise of this kind as in the past, escalation factors will remain present as long as the United States and Iran have not reached a deep and mutual understanding on managing the Strait of Hormuz, and subsequently the Iranian nuclear program, and as long as the Israelis have not stopped striving to achieve a comprehensive military resolution against Iran and its allies in Lebanon or even Yemen.
Written by Samer Hasn, Senior Market Analyst at XS.com
