Oil Plunges 15% as Iran Ceasefire Sparks Global Market Rally

Global oil prices plunged and stocks surged Wednesday after the U.S., Israel, and Iran agreed to a two-week ceasefire, pulling markets back from the brink of a wider conflict that had choked off a critical artery for global energy supplies.

The dramatic reversal came just hours before a deadline from U.S. President Donald Trump for Iran to reopen the Strait of Hormuz. The news sparked an immediate risk-on rally, with West Texas Intermediate crude futures falling about 15% to trade near $96 a barrel after briefly touching $114 earlier in the day.

"This was a market that had been starved of good news," Josh Gilbert, an analyst at eToro, told Bloomberg. "We’ve seen an instant selloff in crude, pulling back 16% to under $100 as markets price in the prospect of the Strait of Hormuz reopening. It goes to show how much geopolitical risk was baked into crude."

The reaction rippled across asset classes. Brent crude, the international benchmark, fell 13% to $95.36 per barrel. In equity markets, S&P 500 futures jumped over 2.5%, while Japan's Nikkei 225 surged about 5%. The U.S. dollar, a haven during the conflict, fell broadly against a basket of currencies, with the dollar index (=USD) hovering near a one-month low at 98.956. Gold prices, however, climbed more than 2% to $4,812 per ounce, suggesting some investors sought a hedge against lingering uncertainty.

The core of the conflict has been Iran's effective closure of the Strait of Hormuz, a strategic waterway that handles about 20% of the world’s oil and one-fifth of its liquefied natural gas (LNG). The six-week disruption sent oil prices soaring over $70 a barrel and fanned fears of a global inflationary shock, prompting frantic hedging from governments and corporations. The ceasefire, brokered by Pakistan, has paused the immediate threat, but the path to a lasting peace remains fraught with obstacles.

A Fragile Truce

Despite the market euphoria, analysts caution that the ceasefire is temporary and its success is far from guaranteed. The agreement is subject to Iran ensuring the "COMPLETE, IMMEDIATE, and SAFE OPENING" of the strait, according to a social media post by Trump. In response, Iran's foreign minister indicated that safe passage would be possible for two weeks "via coordination with Iran's Armed Forces."

"Does it mean people are going to take new risks? No, it doesn't," said Martin Whetton, head of financial markets strategy at Westpac. "It would have to actually be a lasting peace."

The pivotal test will be whether negotiations, set to continue Friday in Islamabad, can forge a more permanent resolution. The last time tensions flared to this degree in the region, oil markets saw a sustained risk premium for months. Physical traders appear to be waiting for more concrete signs of de-escalation before committing to cargoes from the Gulf.

Economic Scars Remain

Even with the ceasefire, the recent conflict has left its mark on the global economy. In March alone, oil prices jumped 51%, the second-largest monthly increase since futures trading began in 1983. This surge pushed U.S. gasoline prices above $4 per gallon and drove up costs for everything from airfare to food.

The sudden energy shock threw the global interest rate outlook into disarray. The ceasefire has allowed traders to price rate cuts from the Federal Reserve back into the picture, with the yield on the benchmark 10-year U.S. Treasury note dropping 9.5 basis points to 4.247%.

However, skepticism about a full return to pre-war conditions persists. "The bigger worry is that some damage may linger even with de-escalation," said Charu Chanana, chief investment strategist at Saxo. "The rates story can probably shift from 'higher for longer because of war escalation' to 'cuts may still come, but not as cleanly or as quickly as before'." Analysts at Commonwealth Bank of Australia maintain their view that the conflict's root causes are unresolved, suggesting dollar losses may be short-lived.

This article is for informational purposes only and does not constitute investment advice.