Tight inventories and cautious central banks keep the outlook volatile.
Oil markets experienced a highly volatile session today. The market initially extended its decline as traders continued to price in the possibility of a short-term memorandum between the United States and Iran. The proposed framework would aim to halt the war, address the Strait of Hormuz crisis, and open a 30-day window for wider negotiations. This diplomatic path led the market to remove part of the geopolitical risk premium that had kept Brent above the $100 level.
However, the selloff did not hold. Brent found support around the $97 area before reversing back above $100 after Iranian officials pushed back against the latest U.S. proposal to reopen the Strait of Hormuz. This price action confirms that oil remains primarily a U.S.-Iran geopolitical market. The Strait of Hormuz is still the key variable, and as long as the diplomatic process remains uncertain, oil prices are likely to remain highly sensitive to headlines. Hopes of a temporary memorandum can remove part of the risk premium, while any Iranian rejection, delay, or renewed military risk can quickly bring that premium back into the market.
The most probable case remains the de-escalation path, not because diplomacy is easy, but because the alternative is economically damaging for nearly every major actor with leverage in the situation. The U.S. administration is already managing a difficult inflation backdrop and cannot easily absorb a prolonged period of Brent above $114 without political and monetary consequences. GCC producers benefit from higher prices in the short run, but they also face export disruption, regional security risks, and eventual demand destruction if prices stay too high for too long. China, as a major marginal buyer, faces an import shock at a fragile point in its recovery. Even Iran has limited economic incentive to maintain a closure it cannot fully monetize under sanctions and blockade conditions, although it may still use Hormuz as leverage. This makes de-escalation the higher-probability path, but the road there is likely to remain noisy and headline-driven.
The most constructive scenario for oil could therefore unfold in three steps. First, the U.S. and Iran would agree on a short-term memorandum to halt the war. Second, they would reach a practical arrangement to reopen the Strait of Hormuz and restore shipping activity. Third, they would begin broader negotiations over the more difficult issues, including Iran's nuclear program, sanctions, frozen assets, missile capabilities, and regional security questions.
From a price-action standpoint, the technical reading places key support at $97, with downside targets at $87-90 on confirmed Hormuz reopening and $80-82 on a broader agreement. Upside resistance remains mapped at $114, the prior swing high. The first diplomatic step alone could keep Brent anchored around the $97 support area. Confirmed tanker traffic, normalized insurance conditions, and improved shipping activity could open the way toward $87-90. A broader final agreement, although still distant at this stage, could create a further downside extension toward $80-82.
That said, the path lower is not automatic. The oil market can sell off on diplomatic optimism, but a sustainable move lower requires proof that physical flows are actually normalizing. Tankers need to move freely, war-risk insurance needs to become available, shipping backlogs need to clear, and refiners need to receive Middle East barrels normally again. Without these confirmations, the market may continue to keep a geopolitical and logistical premium embedded in prices.
The alternative scenario remains clearly bullish for prices, although lower probability under the current diplomatic direction. If Iran formally rejects the framework, if negotiations break down, or if fresh attacks hit shipping routes or energy infrastructure, Brent could quickly regain its risk premium and move back toward the $114 resistance area. In that case, the market would price a longer Hormuz disruption, tighter physical supply, and a higher probability of sustained inflationary pressure.
The physical side of the market remains important even under a peace scenario. Middle East Gulf shipments would take time to resume and reach refiners, while inventories and emergency reserves have already been heavily depleted. Reuters reported that the supply shock could worsen even if a peace agreement is reached, because shipments may take weeks to restart and full normalization could take months.
U.S. inventory data also highlights the tightness of the physical market. Crude inventories fell by 2.3 million barrels, gasoline stocks fell by 2.5 million barrels, and distillate inventories dropped to their lowest level since 2005. This means a peace deal may be immediately bearish for futures, but it will not immediately solve the physical market. The market needs to see exports, shipping, insurance, refinery receipts, and inventories stabilize before fully pricing a return to normal conditions.
The macro layer is where this oil cycle becomes systemically important. A prolonged period of elevated oil prices increases the risk that central banks treat the shock not as temporary energy inflation, but as a broader inflation persistence problem. The Iran war has already pushed major central banks into a more cautious holding posture, with policymakers facing higher inflation risks and more volatile markets. Six of the central banks overseeing the 10 most heavily traded currencies left rates unchanged in April, including the Federal Reserve, the European Central Bank, the Bank of England, the Bank of Canada, the Reserve Bank of New Zealand, and the Bank of Japan.
The bond market has reflected this tension. Elevated energy prices, sticky inflation risk, and a delayed easing cycle have kept yields under pressure as experienced with the US 10Y reaching the 4.5%, with the market increasingly pricing a longer period of restrictive policy. This suggests investors are pricing the scenario of a potential multi-quarter inflationary input that could lead to higher rates for longer.
Overall, oil remains caught between two opposing forces. Diplomatic progress between the U.S. and Iran is bearish because it reduces the probability of a prolonged Hormuz crisis, and this remains the higher-probability path. The physical market, however, remains tight; inventories are depleted; any recovery in supply flows will take time. This combination keeps the medium-term outlook volatile and prevents the market from fully pricing a return to pre-crisis conditions even under the base-case de-escalation scenario.