Oil prices jump on US-Iran escalation casting doubts over and agreement

USOIL Analysis

Last week, Iranian Foreign Minister Araghchi declared the Strait of Hormuz "completely open" after the Israel-Lebanon ceasefire ^[1], sparking a wave of optimism for a resolution to the Middle East conflict and a normalisation of energy flows. However, these hopes faded as the situation quickly shifted and the two countries resorted to gunboat diplomacy.

President Trump welcomed the announcement but said the US blockade remains in place until a deal is reached ^[2], prompting Iran to declare the Strait of Hormuz closed again according to domestic media ^[3]. Things escalated further from there, as Iranian forces attacked multiple vessels transiting the waterway according to the UK Maritime Trade Operations (UKMTO), which deems the region a "high-risk operating environment" ^[4]. Meanwhile, the US Navy struck and seized an Iranian-flagged ship in the Arabian Sea, which is "under US Treasury sanctions because of their prior history of illegal activity" according to President Trump. ^[5]

The US President said his envoys would head to Pakistan for talks on Monday but threatened infrastructure strikes should Tehran fail to make a deal, as the ceasefire deadline expires tomorrow ^[6]. However, Iran's state media IRNA dismissed reports of another round of negotiations, though it did not cite specific sources. ^[7]

After another false dawn, the new week begins with markets grappling with fresh hostilities, doubts over negotiations and another cliffhanger looming. With the Strait of Hormuz under a double blockade and ships being attacked, the geopolitical risk premium spikes again and a restoration of energy flows appears as distant as ever. Even if an agreement is reached, the market is unlikely to normalise overnight.

As a result, USOil jumps today, attempting to reclaim the EMA200, which would shift the bias to the upside and open the road to fresh 2026 highs (119.49). A rejection of the EMA200 and the 38.2% Fibonacci level, however, would reaffirm bearish pressure and leave prices exposed to deeper declines.

Despite the escalation, both sides have strong incentives to end the conflict and the current hard stance may simply be an effort to strengthen their negotiating positions. Iran has suffered extensive damage while higher energy prices are hurting US consumers, with Energy Secretary Wright telling CNN that gas may not return below $3 a gallon until next year. ^[8]

Moreover, the situation heightens crude demand destruction risks, weighing on prices. Alluding to these headwinds, the IEA expects consumption to contract this year, with the second quarter decline projected to be the sharpest since Covid-19. ^[9]