But inflation and supply chain risks are still dominating underlying market sentiment.
Oil markets tumbled sharply early Wednesday after a surprise two week ceasefire between the US and Iran triggered a broad risk-on rally, easing fears of prolonged supply disruptions while reshaping expectations for inflation and interest rates.
Crude prices fell decisively below the $100 threshold, with Brent dropping roughly 13% and US benchmarks seeing similar declines, as traders moved quickly to price in the potential reopening of the Strait of Hormuz, one of the conditions of the agreement.
The move marked one of the sharpest reversals in energy markets since the conflict began, unwinding weeks of war-driven price gains and sending ripple effects across global assets. Markets had been nervous Tuesday ahead of a deadline imposed by President Trump in which he had warned that “a whole civilization will die” in escalated attacks that have now been paused.
The S&P 500 and Dow futures were both up around 2.5% early Wednesday while Nasdaq futures were almost 4% higher.
Markets pivot on inflation relief
The sudden drop in oil prices immediately fed through to broader macro expectations. Investors sharply reduced bets on further monetary tightening, with markets now pricing a near-zero probability of a US Federal Reserve rate hike by year-end, down from double-digit odds just days earlier.
Bond markets rallied in response, with Treasury yields falling as traders recalibrated inflation assumptions. Equity markets also surged globally, reflecting renewed optimism that energy-driven price pressures could ease in the months ahead.
But while broader markets rallied, energy stocks moved sharply lower as crude prices sank. Shares of major oil producers declined between roughly 4% and 8%, with liquefied natural gas exporters posting even steeper losses.
The pullback reflects a rapid reassessment of earnings expectations following weeks of windfall gains tied to elevated oil prices.
Still, analysts caution that the sector’s longer-term outlook remains uncertain, given the scale of disruption already inflicted on infrastructure and supply chains during the conflict.
Supply recovery far from immediate
Despite the ceasefire, physical oil markets remain constrained. The reopening of Hormuz is expected to gradually release millions of barrels stranded during the conflict, but restoring normal flows could take months.
Industry leaders warned that fuel supply chains — particularly jet fuel — will not rebound overnight, with logistical bottlenecks and damaged infrastructure slowing the recovery process, Reuters reported.
Shipping activity also remains tentative, with tanker operators weighing security risks before resuming full operations through the region.
Economists and traders alike warn that the repricing may prove premature if geopolitical tensions resurface.
