Why the Iran-US Hormuz Draft Failed to Sink Oil Prices

Bottom line: progress in talks doesn't mean cheap oil

This morning a headline out of Iran rattled markets. Iran announced it holds a draft of an initial, unofficial framework of a memorandum of understanding with the US. The gist: US military forces withdraw from Iran's vicinity and lift the naval blockade, and in return Iran commits to restoring commercial transit through the Strait of Hormuz to pre-war levels within one month.

The market's reaction was the interesting part. Risk assets popped briefly, then faded hard — the Nasdaq gave back about 1.65% from peak to trough in roughly two hours, the dollar dropped sharply before regaining its footing, and oil dipped then clawed back almost all of its losses. Even so, crude was still down around 3% on the day at the time of recording.

What the draft actually says

A few details stand out. Military vessels are not included in this draft. Management of routes and ship traffic through Hormuz would be handled by Iran in cooperation with Oman. If a final deal is reached within 60 days, the agreement gets approved as a binding UN Security Council resolution. And Iran was explicit that no step is taken without tangible verification.

Here's how I read it. Iran's terms are essentially: we want full control of the Strait, we dictate when traffic moves, and we want the US military out. The market's verdict is that this simply isn't going to happen — the US is unlikely to back down.

Why oil dropped and immediately reversed higher

The big drop followed by an instant recovery tells the whole story. If Iran controls the Strait, it can impose tolls. And that changes the structure of the oil price.

A persistent toll on crude moving through Hormuz acts like a tax on production and transit. That cost gets passed through, which structurally keeps oil prices elevated. Supply might start flowing again, but the baseline price resets higher. If the terms genuinely pointed toward oil flowing like it did before the war, you'd expect prices much lower. The fact that they didn't tells you there are still major contention points between the US and Iran.

On top of that, Israel still looks ready to re-escalate if needed, and so does Iran. So the market is sitting here saying oil is unlikely to move meaningfully lower.

My takeaway: lean toward inflation and a firm dollar

This leaves me roughly where I've been for weeks. I still think inflation is likely to rise, and I think the dollar stays decently strong here — I'm watching for a DXY breakout above the level we've been tracking.

As long as oil stays stagnant around this zone, higher gas prices keep trickling through the global economy and, in my view, push inflation structurally higher. That keeps the door open for rates to climb further, which is why I'm still long yields — short US bonds. My TLT short is unchanged, with a stop above structure.

The hard question I can't answer cleanly is: who does time favor? Iran can sit and wait, knowing the inflation and economic pain lands near an election cycle. But having its main income source challenged hurts Iran too. The jury's out.

FAQ

Q: It was progress in negotiations — why didn't oil fall much? A: Iran's terms effectively demand control of the Strait and the ability to impose tolls, so the market doesn't believe crude will flow freely like before the war. Tolls structurally keep oil elevated.

Q: So how do you view rates and the dollar? A: I think inflation gets stickier and rates have room to rise, so I lean short US bonds (long yields) and toward a stronger dollar.