Donald Trump announced that there would be a 2-week freeze on military action towards Iran, and almost immediately, market participants reacted by pushing down oil prices dramatically and pushing up stock prices because they believed the announcement may help to relieve tension in the Middle East for at least 2 weeks. 

The primary driver for the rapid movement in the markets was the expected reopening of the Strait of Hormuz, where 20% of the world’s oil supply flows through one of the world’s greatest energy choke points. 

Without the threat of shipping lane disruptions, traders quickly covered their panic positions that had pushed oil prices to record highs only weeks before.

Oil Prices Drop Nearly $20 Per Barrel

The oil market experienced a dramatic drop this week after the ceasefire was announced between both parties, causing the price of global benchmark Brent crude oil to fall about $94.00 per barrel and West Texas Intermediate (WTI) crude oil to fall about $20.00 per barrel to settle around $78.00 per barrel. The decline in oil prices indicates that the conflict between the U.S. and Iran and the related “risk premium” that was built up prior to the fall in oil prices were too great. 

Traders became concerned about the potential for a protracted shutdown of the Strait of Hormuz (the route used for transporting oil) and the resulting effects on oil supply; however, when it was confirmed that the Strait of Hormuz would be opened, the markets reacted very quickly and corrected themselves to reflect that developments.

Why Oil Prices Had Surged So Dramatically

In late February, oil prices began to spike significantly as tensions rose between the US, Israel, and Iran. After various attacks, Iran prohibited oil tankers from transiting through the Strait of Hormuz.

This move caused alarms to go off worldwide.

Oil tanker owners are now avoiding the area. As a result of this and skyrocketing shipping insurance, crude oil prices went up over 50% in March alone, and this was one of the largest monthly increases ever.

Countries reliant on imported energy supplies — and in particular, many European and Asian nations — have begun to prepare for an extended outage of energy supplies.

Governments are fearful that the rising cost of petroleum will cause inflation to rise and also slowdown the economies.

Global Markets Rally After Ceasefire Announcement

Global markets experienced a surge of relief following the announcement of a cease-fire.

The S&P 500 futures rose by over two per cent, indicating a great deal of optimism from investors.

In addition,

Prices of Treasury bonds in the U.S. rose.

The Australian dollar increased by more than one per cent.

The euro appreciated against the U.S. dollar.

Cryptocurrencies went up as well.

This widespread market reaction shows that there is renewed interest in taking on risk among investors.

When geopolitical risks are reduced, it is very common for investors to transfer funds out of safe assets and into equities and other higher-risk assets.

Why the Strait of Hormuz Is So Critical

The Strait of Hormuz holds a key position as one of the major transportation routes in international maritime commerce. The strait is the dominant route for oil-exporting countries in the Arabian/Persian Gulf region to reach worldwide consumers. It is situated geographically at the north end of the Arabian Sea and separates Iran from Oman. 

Approximately 20% of the total supply of crude oil and oil products in the world passes through the Strait on a daily basis; therefore, any interruption to this flow would have an immediate impact on global energy prices. Traders reacted very rapidly after the announcement made by Iran on the resumption of safe passage of tankers through the Strait after a two-week ceasefire period.

A Temporary Pause — Not a Final Peace Deal

Analysts point out that while the markets are feeling optimistic, it’s highly uncertain at this time.

Trump has announced a ceasefire, but it’s just a temporary ceasefire based on the current negotiations between the U.S. and Iran. Both sides have indicated that they’re talking about a more comprehensive 10-point peace plan to help to prevent an escalation in the future.

Iran is stating that they can guarantee that there won’t be any attacks on tankers in the Strait of Hormuz during the ceasefire period if the attacks stop.

If the talks break down, there’s a chance that tensions will escalate quickly again, resulting in a spike in oil prices again.

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