In a surprise statement that sent ripples through London trading floors, Donald Trump announced this morning that a new deal with Iran is ‘largely negotiated’, including a reopening of the Strait of Hormuz. The claim, made on Truth Social, has sparked a flurry of activity in oil markets, with Brent crude futures dropping sharply before paring some losses. For the City, this is a classic case of tail risk reversal. The Strait of Hormuz, through which about a fifth of global oil passes, has been a persistent source of geopolitical premium in crude prices. If the former president is to be believed, that premium may soon evaporate.
But let’s be clear: the phrase ‘largely negotiated’ is deeply ambiguous. It could mean the final text is ready for a signing ceremony, or it could mean the parties have agreed on principles but the details remain sticky. Markets hate ambiguity, which is why the initial drop in oil was followed by a rebound. The devil, as ever, will be in the details. Any deal that genuinely reopens the Strait on a permanent basis is a game-changer for energy markets. It would remove a key risk factor that has kept supply chains on edge since the 2019 attacks on Saudi Aramco facilities. For investors, this is a textbook example of how political events can upend carefully laid hedging strategies.
From a fiscal perspective, cheaper oil is a double-edged sword. It gives central banks more room to ease monetary policy without stoking inflation; the Bank of England will be watching closely. But it also hurts the UK’s North Sea producers, whose profitability depends on high prices. The gilt market, which has been on a rollercoaster of its own, may find some relief if inflation expectations moderate further. However, any deal with Iran is unlikely to satisfy hardliners in Washington or Tehran, and the risk of a breakdown remains high. For now, the market must price in the possibility of a seismic shift in Middle East geopolitics. Capital will flow towards risk assets, but scepticism is warranted. After all, we have seen this movie before: the 2015 JCPOA was hailed as a historic deal, only to be torn up three years later. This time, there is no guarantee of longevity.
What does this mean for the UK? A reopening of the Strait would lower our import costs and ease pressure on the trade deficit. But it also reduces the urgency for domestic energy investments, which could undercut efforts to boost energy security. The Treasury will be weighing these trade-offs. For the average punter, falling pump prices would be a welcome relief in a cost-of-living crisis. But as any finance editor will tell you, good news for consumers often means headwinds for certain sectors.
In summary, Trump’s claim is a classic market-moving headline. But the market should be cautious. The history of US-Iran negotiations is littered with failed attempts. For now, I’d advise watching the parities and adjusting portfolios for a range of outcomes. The bottom line: volatility is back, and it’s here to stay.
