Oil surges 3% as Iran threatens retaliation; stocks rise on peace deal hopes

The oil market lurched higher on Tuesday morning as Iran promised to strike back against American military operations in the Strait of Hormuz, yet the stock market climbed anyway—a split-screen moment that captured the peculiar logic of markets caught between fear and hope.

Brent crude, the international benchmark, rose 3.9 percent to $97.07 a barrel. West Texas Intermediate futures, the US standard, gained 2.9 percent to close at $93.82, a jump that reflected genuine concern about supply disruptions in one of the world's most critical shipping lanes. The moves came after the US Central Command confirmed Monday that American forces had struck Iranian vessels suspected of laying mines in the strait—a tactical operation the Pentagon framed as defensive, though Tehran saw it as a breach of an existing ceasefire agreement.

What made Tuesday's trading unusual was that stocks refused to follow oil higher. The S&P 500 climbed 0.8 percent and the Nasdaq jumped 1.3 percent by mid-morning, while the Dow Jones Industrial Average barely moved. The divergence suggested investors were parsing two competing narratives: yes, military tensions were rising, but diplomatic channels appeared to be warming. President Trump had posted on Truth Social Monday morning that talks with Iran "are proceeding nicely," though he qualified the statement by saying the US would accept only "a Great Deal for all or, no Deal at all." Iran's semi-official Tasnim news agency echoed a similar tone, describing recent negotiations as "overall good," though it attached a condition: Washington would need to release $24 billion in frozen Iranian assets to reach any agreement.

The timing mattered. Trump's diplomatic message came before the military strikes, suggesting the administration was attempting to hold two positions simultaneously—projecting strength through military action while signaling openness to negotiation. He also announced he had pressed Saudi Arabia, Qatar, Pakistan, Turkey, Egypt, and Jordan to sign the Abraham Accords, the US-brokered framework for normalizing relations between Israel and Arab states, a move that could reshape regional alignments if successful.

But beneath the stock market's optimism lay a harder reality about energy markets. Analysts at UBS, the Swiss investment bank, warned that cumulative oil production losses could exceed 1 billion barrels by the end of May. Global oil inventories had already fallen by a combined 246 million barrels in March and April alone. The bank's assessment was stark: the world oil market remained "strongly undersupplied," even as major energy exporters like the United States rushed to increase their output.

The persistence of elevated oil prices was already reshaping expectations for monetary policy. Inflation had climbed to its highest level in three years, driven partly by energy costs tied to the Iran conflict. Traders were now pricing in a 10 percent probability that the Federal Reserve would raise interest rates by a quarter point at its July meeting—a dramatic shift from less than 1 percent odds just a month earlier, according to CME FedWatch data. The prospect of rate hikes, rather than cuts, was a reversal that would ripple through every corner of the financial system.

The stock market's recent strength—the S&P 500 had notched its longest winning streak since late 2023, with the Dow up 2.1 percent the previous week—suddenly looked fragile if energy prices stayed high and the Fed held rates steady or raised them. Investors were betting that diplomacy would succeed and tensions would ease, allowing oil to fall and inflation to cool. But if Iran followed through on its retaliation threat, or if the ceasefire collapsed entirely, that calculus would invert quickly. The market's current posture was one of cautious optimism, but it was an optimism that depended entirely on negotiations holding and military escalation stopping.