Crude oil prices plunged more than 7% on Monday, just one day ahead of the US midterm elections, as renewed hopes for a diplomatic solution to the US–Iran conflict triggered a sharp sell-off in energy markets.
The sell-off followed comments from US President Donald Trump, who suggested that Iran was interested in reaching an agreement, stating that Iran wants to "make a deal and that could happen."
Over the weekend, US Secretary of State Marco Rubio also emphasized that President Trump would prefer a diplomatic resolution rather than further military confrontation.
Markets:
Equities: First up on negative oil prices, then falling in the later trading session, led by Tech stocks
Bonds: Government bond yields fell - US 2y yield 4.60%, US 10y yield 4.91%, Japan 10y yield 2.77% - France 10y yield 4.90%
Commodities: Oil prices slump more than 7%, WTI around USD 96/barrel and Brent around USD 104/barrel;
Precious metals rebound, gold at USD 3’945/oz, silver at USD 50/ozCurrencies: US dollar trading sideways - Japanese Yen remains around USDJPY 158 - Swiss franc clearly stronger
Cryptos: falling - Bitcoin below USD 77k
Volatility: The VIX index moving back above 17 - The window for relatively inexpensive portfolio hedging is still there
My View: I am not surprised by the timing. Just a day before the US midterm elections, Trump tries to bring down energy prices, potentially easing pressure on American consumers suffering from high energy costs.
However, I remain highly skeptical that the conflict will be resolved as quickly and easily as the latest headlines suggest.
We have witnessed this pattern repeatedly throughout the eight-month conflict: oil prices plunge on hopes of a diplomatic solution, only for negotiations to disappoint, tensions to escalate and prices to surge again.
A willingness to negotiate is not the same as reaching an agreement. And even an agreement does not guarantee a lasting resolution. And few days later, with the midterm elections behind him, President Trump may face different political considerations, potentially changing the dynamics of the conflict.
My base case remains that a lasting diplomatic resolution will be difficult to achieve, while the risk of renewed escalation and another sharp spike in oil prices remains substantial.
The coming days could prove crucial in determining whether today's oil price collapse marks a genuine turning point or merely another temporary pause before renewed volatility.
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