According to the 21st Century Business Herald, U.S.-Iran negotiations in Islamabad concluded on April 12. As reported by CCTV News, the two sides failed to reach an agreement. On the 13th Beijing time, U.S. futures markets opened lower, with S&P 500 futures briefly falling more than 1%. WTI crude oil May futures broke through $100 per barrel, rising more than 8%.
Last week, the U.S.-Iran ceasefire agreement and subsequent bilateral negotiations on follow-up arrangements boosted financial markets. The Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite rose by 3.04%, 3.56%, and 4.68%, respectively, with the Nasdaq—which had been sold off recently—performing slightly better. The yield on the 10-year U.S. Treasury note edged down slightly from 4.343% (at the close) on April 3 to 4.317% on the 10th; Spot gold rose 1.53%; May West Texas Intermediate (WTI) crude futures fell 13.42%, and June Brent crude futures dropped 12.68%; Bitcoin saw a 5.48% surge as funds flowed back into Bitcoin ETFs and the market rebounded; the U.S. Dollar Index fell 1.42%.
However, the shadow of high oil prices has not receded, and the outcome of U.S.-Iran negotiations will be crucial. With significant differences in the positions of the U.S. and Iran, future negotiations will remain extremely difficult. The extent of concessions the U.S. is willing to make, as well as the demands Iran puts forward, will both influence the negotiation process and the final outcome; the situation in the Middle East is unlikely to return to normal in the short term.
Crude oil market pricing is abnormal, and risk levels have risen sharply
If credit market spreads widen (referring to a sudden expansion in the spread between lower-rated and higher-rated bonds), investors will become extremely nervous, as this signals tightening market liquidity, potentially soaring borrowing costs, and possible defaults by financial institutions with weaker credit foundations. In 1998, Russia’s default on its international bonds triggered a financial storm that caused global financial markets to plummet, leading to the collapse of the renowned Long-Term Capital Management (LTCM). Similarly, current crude oil shipping costs are far higher than the notional prices of the front-month futures contracts, and changes in the crude oil market price structure are brewing a global energy crisis.
The ongoing conflict in the Middle East is altering the flow of global crude oil trade. First, the global crude oil supply chain has been disrupted, and the spread between futures and spot prices has broken decades of stability. WTI and Brent are the world’s most important pricing benchmarks and serve as critical reference prices for crude oil producers. Although WTI crude has a lower sulfur content than Brent, Brent’s market dominance has historically kept its trading price higher than WTI’s. However, the market has recently undergone a significant shift. As the world’s largest oil producer, the United States has seen a surge in demand as the Middle East conflict rages and the Strait of Hormuz remains under restrictions, prompting many Very Large Crude Carriers (VLCCs) to head to U.S. ports for loading. U.S. crude oil exports rose from 3.89 million barrels per day in March to 4.9 million barrels per day in April. Currently, WTI’s pricing power exceeds that of Brent, and its price is higher than Brent’s. Meanwhile, China and India have turned to Brazil (all three are “BRICS” nations); in March, China imported an average of 1.6 million barrels of crude oil per day from Brazil, setting a new historical record.
Due to restrictions in the Strait of Hormuz, actual global crude oil delivery prices are far higher than normal spread levels. Dated Brent (spot Brent crude) serves as a key global benchmark for spot crude oil pricing, applicable to oil-producing regions outside the Americas. According to comprehensive reports, there is a significant divergence between spot and futures prices. While crude oil futures prices fluctuate wildly in response to real-time news, loading prices in major crude oil supply markets have been steadily rising. Dated Brent influences short-term (the next ten-plus days) physical delivery prices, while futures prices reflect investors’ expectations for crude oil prices in the coming months.
Judging by the delivery prices released by major markets, the premium levels for physical delivery are approaching historic highs. Last Thursday, the loading price for Forties crude in the (UK) North Sea reached $146.43 per barrel, $27 higher than the June Brent futures contract and $20.25 higher than the Dated Brent index compiled by S&P; Cabinda crude from Angola in West Africa was more than $10 higher than Dated Brent; Canadian heavy crude for June delivery was $13.55 higher than the May contract; Dubai crude trading prices fluctuated between $100 and $110 per barrel, peaking at $170 per barrel; Saudi Arabia’s light crude sold to Asia in May was $19.50 per barrel higher than the Oman/Dubai benchmark, also setting a record high. The sharp fluctuations in oil prices have already caused significant losses for Vitol Group (a world-renowned commodities trader).
Due to disruptions in the crude oil supply chain, some countries in Europe and Asia have begun turning to the coal market. Thailand has resumed coal-fired power generation, while Japan and South Korea have eased restrictions on coal use. Italy has extended the deadline for phasing out coal-fired power generation to 2038; in Germany, coal-fired power generation has surpassed that of natural gas.
Rising Global Inflation Pressures May Derail U.S. Economic Growth
For oil-producing nations, particularly the United States, soaring oil prices have brought immense wealth, but they have also brought even greater inflationary pressures. Most countries and regions around the world have barely managed to keep inflation in check, but it now appears that inflation may be making a comeback. With the national average gasoline price in the U.S. exceeding $4 per gallon, the public has long been voicing their discontent. Although the U.S. is projected to grow by 2.1% for the full year of 2025—matching the 2024 rate—weak investment in the fourth quarter has led to a downward revision of GDP growth to 0.5%. Typically, the U.S. experiences its weakest growth in the first quarter. With inflation currently on the rise, eroding household purchasing power, market concerns about economic growth in the first quarter of this year are particularly acute. The impact of the military conflict in the Middle East on U.S. inflation has been immediate. According to the Consumer Price Index report released by the U.S. Department of Labor on April 10, the inflation rate rose to 3.3%, while the core inflation rate—excluding volatile food and energy prices—stood at 2.6%.
Since March 2022, the Federal Reserve has been striving to bring inflation back down to its policy target of 2%. Although the target seemed within reach, it has not been achieved, and the Fed is now drifting further away from its established goal. As shown in the table, the surge in crude oil prices has had a significant impact on inflation. If this leads to rising prices for other goods and services, the U.S. will once again suffer from inflationary pressures. With some oil production and storage facilities in the Middle East having been bombed, it remains unclear when the Strait of Hormuz will reopen to free passage. It is expected to take at least six months for oil prices to return to normal levels, thereby increasing global inflationary pressures.
The breakdown of U.S.-Iran negotiations has had a massive impact on financial markets. This week, U.S. publicly traded companies will begin releasing their quarterly reports, with bank stocks leading the way and tech stocks set to follow at the end of the month. The U.S. Department of Labor will release the Producer Price Index (PPI), which is expected to rise, indicating increased price pressures for manufacturers. On April 29, the Federal Open Market Committee (FOMC) will announce its interest rate decision, with the federal funds rate expected to remain unchanged.
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