Negotiations between Washington and Tehran took a major step backward: the U.S. carried out strikes against Iranian facilities following the downing of a U.S. MQ-1 drone, while Iran’s Islamic Revolutionary Guard Corps announced retaliatory strikes against a U.S. airbase.
A key trigger for Iran, however, seems to have been Israel resuming military operations in Lebanon, after which the Iranian news agency Tasnim reported that Tehran had suspended talks with the U.S. At the same time, there were reports that Iran was exploring ways to put more pressure on Israel and its allies, including potential moves around the Strait of Hormuz and the Bab el-Mandeb Strait
Subsequently, oil prices rose, but the S&P 500, Nasdaq, and Dow Jones Industrial Average have remained resilient, suggesting investors still expect a deal sooner rather than later.
But what if they are wrong?
According to Neil Shearing of Capital Economics, at the current pace of inventory drawdowns, global commercial oil stocks could fall to critically low levels by the end of June 2026.
In the United States, the Department of Energy reported last week that crude oil and petroleum product inventories in strategic reserves stand at 1.584 billion barrels and are still declining. The last time they fell below 1.5 billion barrels was in March 2003. Japan’s oil reserves have also dropped to historically low levels.
Thus, if the conflict is still unresolved by the end of the month, market anxiety is likely to rise, especially in the energy sector.
The thing is that even in the U.S., the major oil exporter, inflation driven by higher energy prices came in at 0.4% month-over-month and 3.8% year-over-year in April, whereas core inflation rose 0.2% on the month and 3.3% year-over-year.
The good news is that almost every surge in oil prices seems to be followed by posts on Truth Social highlighting progress in negotiations, suggesting that keeping energy prices under control remains a top priority for Washington. This raises the chances, if not of meaningful progress toward reopening the Strait of Hormuz in the coming weeks, then at least of another TACO from the U.S. president.
Still, it is worth keeping in mind that even if an agreement is reached, restoring normal oil flows through the Strait will take time, meaning the effects of the disruption could continue to be felt long after.