U.S. equity markets surged Tuesday following reports that President Donald Trump is willing to end the American military campaign against Iran, even if the vital Strait of Hormuz remains largely closed. The news triggered a euphoric rally in US equities, though oil prices remained volatile amid ongoing threats to global energy supplies.
According to the Wall Street Journal, President Trump reportedly informed aides that he is prepared to halt military operations in Iran regardless of the status of the Strait of Hormuz, a critical chokepoint for global oil exports. The report sent stock futures jumping early in the trading session, reversing earlier losses driven by fears of a prolonged conflict.
However, the potential for de-escalation was complicated by fresh hostilities. Earlier in the day, an Iranian drone strike hit a fully laden Kuwaiti oil tanker off the coast of Dubai, marking one of the most significant attacks on a vessel in over a month of war. The incident caused oil prices to fluctuate, with crude swinging between gains and retreats as traders assessed the trajectory of the conflict.
The Strait of Hormuz remains effectively closed to most maritime traffic more than a month after the US and Israel launched strikes against Iran. While Iran has stated that "non-hostile vessels" may transit the waterway if they coordinate with Iranian authorities, reports indicate that only a trickle of ships have been able to pass through recently. A Financial Times report noted that the last known jet fuel shipment from the Middle East bound for the UK is due to arrive later this week, raising concerns of imminent aviation disruptions.
Energy analysts have issued stark warnings regarding the potential economic fallout if the conflict persists. Macquarie Group strategist Vikas Dwivedi stated that refiners could face delays of several weeks for oil even after the strait is fully reopened. In a recent note, Macquarie warned that if the war drags on through June with the strait shut, oil prices could hit a record $200 per barrel. FGE NexantECA offered similar projections, suggesting prices could surge to $150 or $200 if the near-closure continues for six to eight weeks.
The conflict has also expanded geographically. Iran-backed Houthi militants in Yemen have entered the war, launching ballistic missiles at Israel for the first time since the US-Israel campaign began. The Houthis' entry marks a significant escalation, with European officials reporting that Iran is pushing the group to prepare for renewed attacks on Red Sea shipping. Additionally, a Financial Times report highlighted an Iranian strike on a Kuwaiti power and desalination plant, stoking fears regarding regional infrastructure.
Despite the report of a potential US exit strategy, President Trump has maintained a tough rhetorical stance. In recent days, he has threatened to escalate attacks on Iran's energy infrastructure and desalination plants. The President also reportedly floated the idea of seizing Kharg Island, Iran's critical oil-export hub, and has urged other nations to launch missions to control the Strait of Hormuz. In a separate development, Trump claimed Iran allowed 10 oil tankers to pass through the strait as a "present" to the US, though Tehran has denied direct talks have taken place.
The volatility in energy markets is already impacting consumers. US retail gas prices rose above $4 a gallon for the first time since August 2022. The Financial Times reported that fuel costs for the global shipping industry have increased by nearly $5 billion since the conflict began, with major carriers like Maersk imposing emergency fuel surcharges.
As the war enters its fifth week, markets remain divided on the likelihood of a resolution. While stock traders reacted positively to the news of a potential US withdrawal, energy strategists and geopolitical analysts warn that the situation remains precarious. Sam Lynton-Brown of BNP Paribas noted that central banks are expected to remain hawkish in the face of persistent inflationary pressures from energy shocks. With US troops continuing to arrive in the region and new fronts opening, the path to a stable resolution remains uncertain.