Oil prices surged higher at the start of the week, with a significant rally on Monday night, as US-Iran negotiations hit a deadlock. Iran has appointed a hardliner to power and reshuffled its military leadership, increasing the risk of an escalation in tensions and causing geopolitical risk premiums to rebound once more.
Iran has stated that even if an agreement is reached with Oman, it does not mean the Strait of Hormuz will reopen. Tehran has put forward a series of tough demands, effectively setting extremely high political and economic barriers for the strait's reopening. Regarding the Iran issue, President Trump appears to have no quick solution, reigniting investor concerns about supply disruptions.
Where to begin
The conditions for the full reopening of the Strait, as outlined by Iran, include an end to the US maritime blockade, the withdrawal of the US Navy and Air Force from Iran's periphery, and demands for compensation for losses from recent conflicts, the lifting of sanctions, and the unconditional unfreezing of Iranian assets. Trump has likened the repeated confrontations between the US and Iran to a game of chess. When discussing Iran-related topics, he indicated he is handling the matter with a low profile, stating the US is currently engaged in "semi-negotiations" with Iran. American officials have said Trump has been persuaded to de-escalate tensions at this stage, judging him to be patient and expecting him to weather the current diplomatic impasse. Trump's current focus is on ensuring the smooth flow of global energy through the Strait of Hormuz, but he has also warned that the US will retain the option of military action if Iran attacks more ships. After Iran demanded compensation for the military conflict, Trump countered that the US would also be making claims against Iran, emphasizing that the US effectively controls the Strait of Hormuz and has cleared mines planted by Iran in that strategic oil waterway.
The dynamic of the standoff has shifted, with Iran now assuming the role of the pressuring party, which has once again changed the situation. The continued rise in oil prices suggests a reduced expectation for the strait's reopening in the short term, while concerns over European energy supplies have driven sharp increases in the prices of natural gas and diesel. The extent of the oil price rebound will also depend on the actual level of supply shortage in the crude market. Last week's data showed a rebound in crude oil flows through the Strait of Hormuz; however, shipments from Saudi Arabia's Yanbu port have decreased due to threats from Yemen's Houthi rebels. The market still needs time to assess the actual supply situation in the Middle East amid the US-Iran negotiation deadlock.
Despite the sharp rise in oil prices on Monday, the increase in the monthly spread was relatively small. This suggests that the price surge is more driven by geopolitical concerns. The perceived weakness of the US, Iran's military reshuffle, and earlier claims by Saudi Arabia that Iran was preparing to attack it have led Saudi Arabia to sign a joint defense agreement with Pakistan and Turkey to manage risks. The market is worried about a further escalation of geopolitical risks, which is the primary driver behind oil prices breaking higher again. During this period of high volatility, risk management is crucial, and participation should be cautious.
Daily Dynamics
WTI crude oil futures settled up $3.95, a gain of 5.05%, at $82.13 per barrel. Brent crude oil futures settled up $4.17, a gain of 4.99%, at $87.72 per barrel. INE crude oil futures rose 4.06% to close at 553.7 yuan.
The US Dollar Index rose 0.21% to 99.81. The USD/CNY exchange rate on the Hong Kong Stock Exchange fell 0.04% to 6.728. The US 10-year Treasury note fell 0.36% to 108.31. The Dow Jones Industrial Average fell 0.11% to 53,975.98.
Recent Developments
Iran's Foreign Ministry Spokesman, Baghaei, stated at a press conference that details regarding charging tolls for new routes in the Strait of Hormuz are not being discussed at this stage. He confirmed that while no specific details have been discussed, mechanisms will be established to ensure the safe passage of shipping through the Strait, covering areas like environmental protection, maritime service cooperation, and combating crime. The spokesman also noted that Iran is not currently negotiating with Washington but is exchanging information through intermediaries, with decisions on future actions to be made based on developments. The focus of the entire diplomatic apparatus is on advancing negotiations with Oman to finalize the shipping routes. All negotiations conducted by the Foreign Ministry are under the strict supervision of the Supreme National Security Council and follow directives from higher authorities.
President Trump has been preparing the groundwork to declare victory in the war with Iran, planning to announce the end of the conflict once the Strait of Hormuz is fully reopened. He has even privately indicated to aides a willingness to walk away, even without a nuclear deal. However, Iran's latest demands have made this goal more distant. Iran has presented a series of hardline demands, including billions of dollars in war reparations, the withdrawal of US forces from the region, an end to the maritime blockade, the lifting of all sanctions, the unfreezing of Iranian assets, and a cessation of threats and military actions against its regional allies. This strategy has effectively set a very high political and economic price for the strait's reopening. Think tank analysts suggest Iran is fully aware of Trump's eagerness to disengage, leading to its tough stance. The White House has shifted its focus from nuclear talks to the reopening of the Strait of Hormuz in recent weeks. However, Iran continues to maintain a deterrent presence over the waterway with sporadic missile and drone attacks. Trump has prematurely declared the strait "open" several times. With midterm elections less than three months away and gasoline prices still higher than before the conflict, Trump is eager to show a domestic victory. He has recently stated that a deal is "close" and hinted at declaring victory even without a nuclear agreement. While US officials insist they will not accept Iran's demands for fees or restrictions, Trump's threats regarding Iran's nuclear capabilities have been relatively downplayed. The issue of funding remains a major obstacle. Iran demands billions in compensation, while Trump has stated he will not allow taxpayer money to go to Iran. Despite these challenges, Trump has recently claimed that the US blockade of Iranian ports means the Strait of Hormuz is "now open," though he acknowledged the risk of attack still exists, indicating he is still searching for a way out.
Crude oil prices strengthened on Monday, but traders remain skeptical about the sustainability of the rally given the lack of progress on reopening the Strait of Hormuz over the weekend. Net long positions in crude oil have only seen a modest rebound in July and are now declining. Investors are interpreting reports of President Trump's "low-key" approach and "semi-negotiations" with Iran as a new cautious strategy. US economic data has also exerted influence, with a weak employment report hurting investor confidence in the relative strength of the US economy. This week's CPI data is expected to show a continued slowdown in core inflation, which could reduce the appeal of crude oil futures as a hedge against the risk of a Federal Reserve rate hike.