How Hormuz was traded for a catastrophe

XBR/USD

Key zone: 97.50 - 101.50

Buy: 102.00 (against a strong positive fundamental backdrop); target 105.00-109.50; StopLoss 101.30

Sell: 96.50 (upon a decisive break above 97.00); target 95.00-93.50; StopLoss 97.20

U.S.-Iran talks in New York have turned Hormuz, Tehran’s main leverage tool, into a bargaining chip. Reopening the strait could crush Brent’s geopolitical premium, but the physical oil shortage and risks of new attacks are still restraining sellers.

Brent has a chance to fall below $100, but traders still do not believe in a quick peace.

A reminder:

The oil market has received what may be the most serious diplomatic signal since the beginning of the U.S.-Iran war. The U.S. and Iran are discussing a phased agreement in New York that would link the reopening of the Strait of Hormuz to an easing of the U.S. economic blockade of Iran.

The framework looks relatively simple only on paper. Iran is prepared to allow the resumption of free navigation through Hormuz in exchange for an end to the economic blockade. At subsequent stages, Tehran could potentially gain access to part of its frozen foreign assets. The main problem is the sequence of actions: neither Washington nor Tehran wants to be the first to give up its main source of leverage.

For the oil market, this is fundamental. Hormuz is now trading almost like a separate geopolitical option embedded in the Brent price. Oil’s reaction shows how dependent the market is on a single headline: before information about a phased deal emerged, the market was moving in the opposite direction.

The market has demonstrated not the formation of a new bearish trend, but extremely high headline volatility: several dollars of price movement can now be determined by a single piece of diplomatic news.

Even now, it is difficult to adequately assess the scale of the oil shock. Before the conflict, around one-fifth of global liquid hydrocarbon consumption passed through the strait. Moreover, the main consumers were not in the U.S. but in Asia: in 2024, about 84% of the oil and condensate passing through Hormuz was destined for Asian markets.

Alternative pipelines in Saudi Arabia and the UAE cannot fully replace the strait. According to EIA estimates, the combined capacity to bypass Hormuz through the Saudi East-West Pipeline and the UAE oil pipeline is around 4.7 million bpd.

That is why any real agreement to reopen the strait means more than just a reduction in political tensions. It potentially restores transportation infrastructure for millions of barrels of oil per day to the global market.

The physical market does not yet fully believe the politicians. This is the main argument against aggressively selling Brent based solely on the negotiations. Oil is falling on diplomatic headlines, but the structure of the futures curve continues to signal a supply shortage.

On September 25, the spread between the two nearest Brent contracts was around $6.80 per barrel in backwardation — one of the strongest levels since April. Such a structure means that buyers are willing to pay a substantial premium for oil with near-term delivery relative to longer-dated contracts.

In other words:

the political market is already partially trading peace, while the physical market is still trading scarcity.

There is another factor reducing the probability of an uncontrolled return of Brent to extreme levels: China sharply reduced oil purchases after the price surge. Thus, the oil market is adapting to the shortage not only by increasing alternative supply, but also through demand destruction.

A potentially powerful combination is emerging for the market:

• Saudi Arabia is increasing its capacity to bypass Hormuz;
• Iran is discussing the direct reopening of the strait itself;
• high prices are reducing Asian demand;
• global producers outside the conflict zone have an incentive to maximize production and exports.

If all four processes continue simultaneously, Brent’s current geopolitical premium becomes vulnerable.

And What Is the Result?

The most dangerous mistake right now is to treat the start of negotiations as equivalent to an agreement. The parties have encountered the problem of sequencing concessions. Iran wants to see an easing of the blockade first. The U.S. wants guarantees of free navigation.

In addition, the military risk extends far beyond Hormuz itself.

On September 25, the market was simultaneously assessing negotiations between Washington and Tehran and new Houthi attacks on Saudi Arabia. It was precisely this factor that limited Brent’s decline.

The simple model of “peace = cheap oil” is insufficient right now. The sanctions issue is far more complicated than a single White House decision.

Another report about negotiations is not enough for a sustained break below $100. What is needed is confirmation of a deal, an increase in actual shipping through Hormuz, lower insurance rates for transportation, and a recovery in exports from Persian Gulf countries.

So we act wisely and avoid unnecessary risks.

Profits to y’all!