Sino-Iranian tug-of-war, Israel launches fierce attack on Hezbollah, "peace deal" faces pressure test just as it begins

On Tuesday, the rare divergence and differentiation in oil prices were mainly due to unexpected military actions by the US military in the southern part of Iran, as well as mixed signals released by US President Trump on the long-term peace negotiations between Tehran and Washington, which kept traders on edge. The freshly released "peace trades" in the financial markets on Monday had just started facing major logical rifts. The "peace trades" revolve around the framework agreement between the US and Iran, the reopening of the Strait of Hormuz, the reversal of oil price risk premiums, and the fall in long-term US bond yields, becoming the main theme of financial market trading. During the Asian morning trading session, the international oil benchmark, Brent crude oil futures for July, rose by 1.6% after experiencing a nearly 7% drop on Monday, reaching $97.72 per barrel; while the US West Texas Intermediate crude oil futures for June (WTI crude oil futures) fell sharply by 5.4%, continuing the previous decline, at $91.38 per barrel. Brent is the global benchmark for seaborne crude oil, more sensitive to supply risks in the Middle East, the Strait of Hormuz, and European/Asian seaborne supply. Therefore, with the US military launching a "defensive strike" in southern Iran and the peace prospects clouded again, Brent is more likely to rebound, reflecting the rising global seaborne supply risk premium. WTI crude oil prices are more linked to pricing for US inland/North American supply and demand, and the June contract is more influenced by the expiry of the previous month's contract, switch to a new month, liquidity, and factors related to US domestic inventories/delivery locations. Some analysts have expressed that the US-Iran negotiations have not broken down but have entered a typical high-risk stage of "fighting while negotiating, and applying pressure while conceding". On one hand, the US-Iran framework agreement is still advancing, and the market was previously trading rapidly with the theme of "reopening of the Strait of Hormuz - resumption of oil flow - decrease in oil price risk premium"; on the other hand, the US military's "defensive strikes" in southern Iran against alleged naval ships and missile launch sites indicate that the ceasefire mechanism is extremely fragile, and any tactical friction could reignite the war premium in oil prices. The sudden encounter of war with the dawn of US-Iran peace The US military stated that it conducted "defensive strikes in the southern part of Iran today," targeting alleged boats trying to deploy mines and some missile launch sites. The US Central Command stated that these actions were aimed at "protecting our forces from military threats posed by the Iranian military." Subsequently, Iranian media reported multiple explosions in the southern port of Abbas, with unknown reasons. On the evening of the 25th local time, Ibrahim Azziz, Chairman of the National Security and Foreign Policy Committee of the Iranian Islamic Consultative Assembly mentioned a meeting they had with Abdulrahim, Commander of the Central Command of Hatem Anbiya in Iran, saying, "There is no doubt that if the enemies of the Iranian nation make a mistake, our armed forces, which are on the highest state of alert, will respond." The so-called "defensive strikes" by the US military undoubtedly complicate the positive progress of the ongoing peace negotiations between the US and Iran. US President Trump stated in a social media post on Monday that he has encouraged Saudi Arabia, Qatar, Pakistan, Turkey, Egypt, and Jordan to join the "Abraham Accord," aimed at normalizing relations between Arab countries and Israel. Trump also stated that negotiations with Iran are "proceeding smoothly," but warned that if the discussions break down, the US may resume military action. Trump wrote, "It's either a great deal for everyone or no deal at all." Swiss multinational investment bank UBS stated last Friday that with continuous interruptions in transportation through the Strait of Hormuz and continuing decline in inventories, the global oil market is showing more signs of tightening supplies. The bank's research report stated that global oil inventories observed in March and April had decreased by a total of 246 million barrels, and by the end of May, cumulative production losses could exceed 1 billion barrels. UBS indicated that the significant decline in inventories shows that the market is still facing a "severe supply shortage"; the bank pointed out that although the diversion of US exports to Asia may have led to a slight increase in oil stored on tankers, onshore crude and refined oil inventories are still rapidly declining. With negotiations and military actions happening simultaneously, the peaceful trade of the Strait of Hormuz faces a stress test due to the conflict On the evening of May 25th Eastern Time in the US, the US military confirmed "defensive strikes in the southern part of Iran," targeting missile launch sites and boats allegedly laying mines; at almost the same time, Trump still stated that negotiations were "progressing smoothly," but warned that military action could be resumed if negotiations fail. The geopolitical situation in the Middle East can be described as reaching a critical stage of "approaching agreements while military frictions escalate simultaneously." From a geopolitical and strategic perspective, Trump is trying to package a limited ceasefire/maritime agreement as a grand scheme to reshape regional order: not only restoring navigation in the Strait of Hormuz but also trying to include countries like Saudi Arabia, Qatar, Pakistan, Turkey, Egypt, and Jordan in the framework of the "Abraham Accord." However, this grand deal actually raises the complexity of US-Iran peace negotiations because Iran is more concerned with sanctions waivers, asset unfreezing, nuclear material handling, and regional ally security, while Israel is concerned about its security interests being undermined by a US-Iran agreement. The latest media reports indicate that Iran acknowledges progress in negotiations but denies that an agreement is imminent, and sees the US position and Israeli factors as key obstacles. Israel's escalation against Hezbollah in Lebanon is one of the biggest external disturbances to this round of negotiations. Iran hopes to incorporate the cooling down of the Lebanon front into the US-Iran peace framework, while Israel insists on retaining the freedom to strike Hezbollah; this expands US-Iran negotiations from "Hormuz and nuclear issues" to a multi-layered game of "Iranian proxy networks, Israeli security boundaries, and regional normalization." According to recent media reports, Netanyahu has announced an escalation in strikes against Hezbollah in Lebanon, with the IDF carrying out a new round of airstrikes on targets within Lebanon; this is happening in a sensitive window as US-Iran negotiations progress, objectively adding difficulty to the agreement's realization. For the financial markets, this means that oil prices will continue to swing violently between two main trading themes: one is "peace trades," with advancements in the US-Iran framework agreement, the reopening of the Strait of Hormuz, and a reversal of oil price risk premiums; the other is "inventory and conflict trades," including mines, missiles, Israel's escalated strikes, Hezbollah's retaliation, and continued support for oil prices with limited physical oil flows. UBS warns that global oil inventories are rapidly decreasing, with a total reduction of 246 million barrels observed in March and April, and if the Strait of Hormuz remains closed, the oil market will continue to face a "severe supply shortage." Therefore, if the US and Iran can secure a 60-day ceasefire agreement, resume mine clearance in the Hormuz, and clarify the nuclear material handling path, oil prices, inflation expectations, and long-term US bond yields may see a temporary relief; but if the Israel-Hezbollah front continues to expand, or if US-Iran negotiations get stuck again on nuclear issues/sanctions waivers, the market will quickly shift from "cooling oil prices trades" back to "energy/inventory crisis trades." Under the extreme tug-of-war between the US and Iran, the oil market no longer believes in the rhetoric of peace, but only focuses on the real oil molecules The latest assessment from Jeff Currie, Chief Strategic Officer at Carlyle Group's Energy Pathway Business, known as the "commodities bull market pioneer," shows that the market cannot just trade tweets and diplomatic statements but needs to see if real oil molecules are flowing again. Jeff Currie, the former head of commodities research at Goldman Sachs, known as the "commodities bull market pioneer", has a significant influence on Wall Street's views of the commodities market. With over 20 years at Goldman Sachs, he later became Chief Strategic Officer at Carlyle Group's Energy Pathway, a position he still holds. He currently also serves as Co-Chairman of Abaxx Markets. Drawing experiences from recent historical processes, Currie pointed out that from the 1990s to the early 21st century, technology stocks dominated the market; then until around 2014, the energy sector took the lead; and afterwards, technology stocks surged again - now technology stocks have an insatiable demand for electricity and metal raw materials. The viewpoint Currie put forward in the interview on Tuesday, "sell the tweet, buy the molecule," essentially suggests that while short-term oil prices may be suppressed by peace expectations, the medium-term is determined by factors such as inventories, shipping schedules, insurance, mine clearance, port operations, and actual export volumes. The current oil market isn't lacking in news, but in deliverable supplies; with Asian inventories nearing minimum operational levels, European reliance on US SPR exports for "blood transfusion," and potential pressures faced by the US in the summer driving season, the cushion for the oil market is already very thin. Even if an agreement is announced tomorrow, the full restoration of the Strait of Hormuz, facility repairs, normalization of shipping insurance, and inventory rebuilding may still take months; thus, every day delayed enhances Iran's negotiation leverage due to the decreasing global inventories.