Oil futures hold with further upside risk ahead

Oil prices edged higher today, with WTI futures rising slightly to 105.12 $/bbl and ICE Brent futures climbing to 111.05 $/bbl.

Oil prices rise amid concerns about a renewed severe escalation in the Middle East war, with hopes for a diplomatic solution deemed stalled as negotiations stall. As the escalation risk targets more oil infrastructure in the region, crude prices are likely to remain higher for longer than the market could expect.

According to Reuters, Iran warned it will launch “long and painful strikes” against U.S. regional positions if Washington renews military attacks.

This threat follows a report from Axios that President Trump was scheduled for a briefing on Thursday regarding fresh strike options and potential ground force manoeuvres to reopen the Strait of Hormuz.

Iranian Aerospace Force Commander Majid Mousavi cautioned that U.S. warships could face the same fate as regional bases, while Supreme Leader Ayatollah Mojtaba Khamenei signalled Tehran’s intent to maintain control over the vital waterway. Iranian Foreign Ministry spokesman Esmaeil Baghaei noted that expecting quick results from ongoing negotiations is “not very realistic.

Despite the upward trend in oil futures settlements, they still seem detached from reality, downplaying the scale of the crisis on the ground. The Economist suggests that traders hold three uncertain beliefs: that the US and Iran will soon reach a peace agreement; that this deal will reopen the Strait of Hormuz; and that, once the strait is accessible, fuel and jet fuel supplies will quickly normalise.

The journal believes that the oil market remains in “La La Land” because traders and speculators continue to underestimate the severity of the supply shock caused by the war in Iran. Despite Brent crude prices spiking above $125 per barrel on April 30, futures markets suggest prices will fall for the remainder of the year, implying a belief that the crisis will soon be reversed. This optimistic outlook assumes a swift peace deal between America and Iran that reopens the Strait of Hormuz and restores the flow of petrol and jet fuel. However, The Economist argues these assumptions are in doubt, noting that the closure of the strait has shut in 14 million barrels of oil a day, and global stocks are poised to reach their lowest levels since 2018.

The disconnect from reality is further complicated by geopolitical and physical constraints. Even if a deal is reached, demining the strait could take months, and damaged oil wells or mothballed refineries may not immediately return to full capacity. Furthermore, President Trump may prioritize the “eradication of the nuclear programme” over a complete reopening of the strait, as the U.S. is an energy exporter. While the market trusts that “things always work themselves out,” experts warn that the world may soon face a massive second inflationary shock that will force governments to shift from supporting demand to managing its destruction.

In any case, it is likely that we will see a new manoeuvre from Trump today, talking about any new de-escalation or progress on the diplomatic track, with the aim of pushing prices down on the virtual chart as if nothing had happened.