Oil prices are taking control of financial markets amid conflicting diplomatic signals and tightening supply conditions.
Oil continues to influence overall risk appetite through its impact on inflation expectations, bond yields and the US dollar. Donald Trump’s alternating diplomatic and confrontational rhetoric has pushed oil prices lower, but it has not significantly improved the outlook for the reopening of the Strait of Hormuz. Physical market indicators continue to signal tightening conditions, despite the recent weakening of futures contracts. Meanwhile, the elevated negative correlation between gold and oil, bond yields and the dollar shows how strongly crude prices are currently affecting different asset classes.
According to Ole Hansen, Head of Commodity Strategy at Saxo Bank, oil continues to exert an influence far beyond the energy market itself. More than any other asset in the current environment, oil prices are shaping broader market sentiment through their impact on inflation expectations, central bank policy expectations, Treasury yields and the US dollar. In practice, oil has now become the main transmission mechanism for markets.
The performance of different asset classes increasingly reflects this relationship. Gold, despite persistent geopolitical uncertainty, is struggling to generate sustained demand. Higher oil prices raise concerns about sticky inflation, push bond yields higher and strengthen the dollar, creating less favourable conditions for non-yielding assets. At present, there is an elevated negative correlation between gold on one side and oil, bond yields and the dollar on the other. Until this relationship changes, oil is likely to remain the dominant macroeconomic driver across markets.
Recent price moves once again showed how sensitive the market is to political rhetoric. Oil prices fell sharply after Trump said the United States was in the “final phase” of talks with Iran, raising hopes that a diplomatic breakthrough could eventually ease supply disruptions. Those hopes weakened after later comments in which he warned that “further fighting lies ahead if Iran does not come to its senses”.
Markets increasingly appear trapped between these alternating signals. The result is significant price volatility, without the one decisive development that matters most: the reopening of the Strait of Hormuz and the normalisation of regional energy flows.
At the same time, market attention is shifting increasingly from missiles to logistics and storage. Kpler data show that since mid-April no tanker carrying Iranian crude has crossed the blockade line, while crude loadings have fallen from around 2.1 million barrels per day before the disruptions to the current level of 640,000 barrels per day. At the same time, floating storage in the Gulf has increased from around 23 million to 42 million barrels, with another 15 million barrels accumulating onshore. These growing inventories represent barrels that are stuck, rather than removed from the market, and form a pressure point that the US administration hopes to use to eventually bring Iran back to negotiations.
However, some cautious signs of movement have emerged. Limited tanker traffic from China and South Korea has recently resumed, while India is preparing to receive cargoes again from Middle Eastern suppliers. These volumes remain only a fraction of normal levels, however, and do not yet indicate any meaningful normalisation.
The latest weekly EIA oil market report provided further evidence of continued tightness in the physical market. Total US crude inventories fell by a record 17.8 million barrels, although almost 10 million barrels of that decline resulted from releases from the Strategic Petroleum Reserve. Commercial crude stocks nevertheless fell by a substantial 7.9 million barrels, while inventories at Cushing declined for the fourth consecutive week.
Imports increased, supported by Venezuelan crude supplies, which reached their highest level since 2018. However, this was largely offset by another rise in exports, as international demand continued to pull US light sweet crude into global markets. Distillate inventories rose slightly, but remain close to their lowest seasonal levels in more than two decades, reinforcing signals of persistent tightness in the middle distillates segment.
Meanwhile, Goldman Sachs estimates that visible global inventories of crude oil and refined products are falling at a record pace, declining by 8.7 million barrels per day so far this month.
For now, futures prices may continue to react to reports on diplomatic efforts and shifting political rhetoric. However, if these developments do not translate into a meaningful increase in physical flows, price weakness may remain driven more by expectations than by fundamentals. Futures contracts react to headlines; physical markets still depend on actual deliveries.
