Oil takes control of markets as diplomacy headlines collide with tightening supply

Key points:

• Crude continues to drive broader market risk appetite through its impact on inflation expectations, bond yields and the US dollar.
• Trump’s alternating diplomatic and confrontational rhetoric has pushed oil prices lower without materially improving the outlook for a reopening of the Strait of Hormuz.
• Physical market indicators continue to tighten despite recent futures weakness.
• Gold’s elevated inverse correlation to crude, yields and the dollar highlights oil’s current strong influence across asset classes.

Oil continues to exert an influence well beyond the energy market itself. More than any other asset currently, crude prices are shaping broader market sentiment through their impact on inflation expectations, central bank thinking, sovereign bond yields and the US dollar. In the current environment, oil has effectively become the market’s main transmission mechanism.

Cross-asset performance increasingly reflects this dynamic. Gold, despite persistent geopolitical uncertainty, has struggled to establish a sustained bid. Higher oil prices raise concerns about inflation persistence, lifting bond yields and the dollar while creating a less supportive environment for non-yielding assets. We are currently seeing an elevated inverse correlation between gold on one hand and oil, bond yields and the dollar on the other. Until that relationship changes, crude is likely to remain the dominant macro driver across markets.

Recent price action again highlighted the market’s sensitivity to political rhetoric. Oil moved sharply lower after Trump stated that the US was in the “final stages” of talks with Iran, raising hopes that some form of diplomatic breakthrough could eventually ease supply disruptions. Those hopes faded after subsequent comments warning that “there’s more fighting to come unless Iran gets smart.”

Markets increasingly appear trapped between these alternating signals. The result has been substantial price volatility without delivering the one development that ultimately matters: a reopening of the Strait of Hormuz and a normalization of regional energy flows.

At the same time, market focus increasingly appears to be shifting away from missiles and towards logistics and storage. Data from Kpler show that since mid-April no tanker carrying Iranian crude has crossed the blockade line, while crude loadings have collapsed from around 2.1 million barrels per day before the disruption to just 640 thousand barrels per day currently. Floating storage within the Gulf has meanwhile surged from around 23 million to 42 million barrels, with another 15 million barrels accumulating onshore. These growing inventories represent barrels trapped rather than removed, a pressure point the US administration hopes may eventually force Iran back to negotiations.

Some tentative signs of movement have nevertheless emerged. Limited tanker traffic from China and South Korea has recently resumed, while India is preparing to restart cargo liftings from Middle Eastern suppliers. However, these volumes remain a fraction of normal levels and do not yet indicate meaningful normalization.

The latest EIA weekly petroleum report added to evidence of continued physical tightness. Total US crude inventories fell by a record 17.8 million barrels, although almost 10 million barrels of that decline reflected a Strategic Petroleum Reserve release. Commercial crude inventories nevertheless declined by a sizeable 7.9 million barrels, while stocks at Cushing fell for a fourth consecutive week.

Imports increased, supported by Venezuelan barrels reaching the highest level since 2018, but this was largely offset by another rise in exports as international demand continued to pull US light sweet crude into global markets. Distillate inventories posted a modest increase but remain near the lowest seasonal levels in more than two decades, reinforcing signs of persistent tightness in middle distillates.

Meanwhile Goldman Sachs estimates visible global crude and product inventories are declining at a record pace, with stockpiles falling by 8.7 million barrels per day so far this month.

For now, futures prices may continue reacting to diplomacy headlines and shifting political rhetoric. However, unless those headlines translate into a meaningful increase in physical flows, price weakness risks remaining driven more by expectations than by fundamentals. Futures trade on headlines; physical markets continue to trade on barrels.