Less than nine days after President Donald Trump’s announcement of the historic two-week ceasefire with Iran, oil prices saw a major reversal, rising 7.8% to end at $102.40 (Brent) and $98.75 (WTI). Oil had plunged as much as 17% when the ceasefire became public knowledge on April 7. Today’s reversal wiped out almost half of that loss, restoring geopolitical risk premium in what was already an unpredictable and highly speculative market.
According to both brokers and market experts, oil prices were supposed to stabilize between the low and medium nineties. Instead, a flurry of developments caused oil traders to reassess their exposure. In particular, there were reports about the Iranian Revolutionary Guard speedboats conducting “inspection” of civilian tankers in the region and satellite images of Iranian missile launchers appearing on the coasts of the Persian Gulf, in addition to previously documented Iranian naval activities. These events caused shipping companies to hike insurance premiums for tankers transiting the Strait of Hormuz, which increased the total cost of passing through the strait to a prohibitive $1 million mark for the first time in the history of the crisis, as the risk of attack remains extremely high.
Strait of Hormuz remains the focus of the dispute. This narrow waterway carries about 21% of the world’s oil traffic daily, or about 21 million barrels per day. Under terms of the truce, Iran is supposed to allow all ships to pass safely through the strait, but according to the report published yesterday by the U.S. Central Command, there were multiple “unsafe approaches” by Iranian vessels on April 14 and 15. The Iranian news agency has retorted that these reports violated the spirit of the ceasefire agreement, noting that overflying by U.S. reconnaissance aircraft was still occurring despite the ceasefire. Both parties deny having violated the agreement, but oil traders clearly do not want to take any chances with geopolitical risk.
Market Anatomy
What is notable about the market performance on April 16 is how it followed the age-old “buy the rumor, sell the news and then buy the fear again” pattern seen countless times in previous energy crises. The initial sell-off that followed Trump’s announcement brought Brent prices down from a peak of $113 to $94 per barrel on April 7 and reduced open interest on WTI contracts on NYMEX by as much as 53%. On April 13, speculator’s net long position reached the lowest levels seen since February, which made oil prices particularly sensitive to bad news.
Upon publication of the first reports about the increased activity of Iranian naval forces in the region by Bloomberg News, algorithmic trading programs responded almost instantaneously. Trading volume for front month Brent exceeded 1.2 million lots (more than double the daily average), driving volatility to 18% and pushing call options with strike prices of $105 and $110. Implied volatility of the May Brent options exceeded 45%.
This development was followed by rapid revision in outlook by analysts from investment banks Goldman Sachs and J.P. Morgan. “The ceasefire gave us time, not peace,” wrote Goldman Sachs in a morning report released shortly before the trading began. “War insurance premiums are still up 120% compared to pre-crisis period, with tanker captains’ demands for double-time bonuses making it hard to operate. Effective supply through the Strait of Hormuz remains constrained by 800,000–1.2 million barrels per day, more than enough to create a deficit in the second quarter of 2024.”
Immediate Market Impact
The immediate effect on oil-linked stocks is clear. National average gasoline prices, which have been declining toward $3.85 since the previous sell-off, saw a reversal and are expected to climb to $4.10 within two weeks. Stock prices of major refinery companies such as Valero and Marathon Petroleum fell 4-6% due to narrowing crack spreads and expectations of higher crude prices. Upstream producers like Pioneer Natural Resources, Devon Energy, and EOG Resources rose more than 5% due to positive developments in the market. Integrated oil majors including ExxonMobil, Chevron, and Shell saw their stock prices rise by 3-4%, thanks to hedges and diversified portfolio.
Oil prices had initially pushed down the price of airline stocks Delta, United, and Southwest by 3-5% as jet fuel prices followed crude prices higher. Downstream refiners and other consumer cyclical stocks, which saw some relief from falling prices on April 7, suffered losses. Overall, however, U.S. market index declined by 0.4%, as investor’s concerns about energy costs outweighed inflation risk from rising crude prices.
Implications for Portfolio Managers
The recent rise in crude prices highlights the harsh reality that geopolitics affects prices, and geopolitical risks are much easier to re-introduce than remove. Traders and investors who bought consumer cyclical and downstream refining names during the previous price decline are suffering losses, while E&P stocks that seemed expensive at $95 per barrel now appear cheap again at $102+.
Portfolio managers and hedge funds that bet on rising volatility started buying put options on S&P 500 energy names to protect their portfolios. However, income investors view the recent price action differently, as many integrated oil companies now yield between 4.8% and 6.2% annual dividend rate. At the same time, master limited partnerships (MLPs) in the oil industry continue offering between 7% and 8% annual dividends from their fee-based operations.
Longer-term investors remain optimistic about the oil market. Current price level of $102 per barrel leaves little room for appreciation, but many strategists are projecting steady demand increases until 2026 that could raise Brent oil price further above $88-$94. There are three main reasons for optimism:
Current inventory levels are at a five-year low after sustained production cuts by OPEC+ countries in Q1-Q2.
Non-OPEC oil production, particularly from U.S. shales, is slowing down due to lower capital investments and higher costs.
Emerging market growth, especially the rapid adoption of AI, makes oil more important than ever for power generation.
In spite of all that, however, several risk factors should be noted by oil investors.
Tail Risks and the Outlook
First of all, the ceasefire expires on April 21, and so far talks held by Islamabad to extend it indefinitely have produced only modest results. Second, OPEC countries indicated that they may impose an additional cut of 500,000 barrels daily, should prices decline further. Third, persistently higher interest rates from the Fed, now supported by recent CPI report, may negatively impact global GDP growth and oil demand. In J.P. Morgan’s forecast, global demand growth remains at 1.4 million barrels per day in 2026, but any GDP reduction by 0.5% will reduce this number by about 400,000 barrels.
Finally, should the Strait of Hormuz situation calm down and allow for more traffic, we can expect inventory buildup beginning by May 1. As a result, the recent price action will probably last just a few weeks more. But the most important lesson that traders have learned in the last ten days is that geographical realities matter more than diplomatic agreements in the short run.
Conclusions
The market’s message is clear: Trump’s ceasefire gave us breathing space, but the underlying problem is hardly solved. The strait of Hormuz reminds us that geography always matters more than politics in the energy market. What changed for oil investors is the realization that in order to be profitable, the energy portfolio must account for volatility and risks.
Michael Hargrove, veteran oil trader and former executive with BP, said it quite succinctly in today’s CNBC interview: “The smart money does not bet on peace in the Middle East. They bet on volatility.”
Time will tell whether today’s rise marks the beginning of a new bull run, or the last volatile swing before the end of a long upward trend.