Oil Markets Bet on Trump's Limits in Iran War
The oil market's reaction to the Iran war was a remarkable display of flexibility and resilience. Despite the unprecedented closure of the Strait of Hormuz, which accounted for a fifth of global oil supplies, prices did not spiral out of control. Benchmark Brent crude surged from $70 to $118 in late March, but fell back to $83 after Washington and Tehran announced a preliminary deal.
The explanation lies in the physical market's ability to respond to the shock. Governments and companies released hundreds of millions of barrels from commercial and strategic stockpiles, while production had been running hot heading into the conflict. Demand also adjusted, with Chinese imports weakening sharply and governments imposing consumption curbs across Asia.
The market's confidence in Trump's ability to prevent a full-blown economic crisis was key. Investors believed he would not allow gasoline prices to surge and risk reigniting inflation, especially with midterm elections looming. This 'Trump put' has been seen before in equity markets, but its impact on commodity markets is significant.