Key Takeaways
This week, the Trump administration signaled confidence that a US-Iran agreement was imminent, driving oil prices lower and stocks higher. However, when the promised day arrived, no deal was announced.
Markets have repeatedly reacted to similar statements from President Donald Trump, betting on a breakthrough that has yet to materialize.
Both Trump and Treasury Secretary Scott Bessent indicated this week that a deal to reopen the Strait of Hormuz could be reached within days.
The Trump administration fueled market optimism this week by suggesting a US-Iran agreement on the Strait of Hormuz was close, sparking a drop in oil prices and a surge in equities. Yet, no deal was ultimately reached.
If this scenario sounds familiar, it's because the president has made dozens of similar claims about an imminent deal to end the war he initiated over five months ago.
Investors have repeatedly responded to these statements by buying into markets, hoping for a breakthrough, even as the conflict appears to be widening and progress on Trump's primary goal—curbing Iran's nuclear ambitions—has stalled.
"There is a huge optimism bias in the market," said Helima Croft, global head of commodity strategy at RBC Capital Markets.
The market consistently assumes that the incentives for both the US and Iran favor a diplomatic resolution to the war. But Croft noted that some investors seem to view "a deal as a time machine" that could reset the Middle East to its pre-war state, an outcome she considers unlikely.
The recent focus of the conflict is the Strait of Hormuz, a vital global oil trade route that has become Iran's key leverage point.
Tehran's effective ability to close the strait—previously an open, toll-free international waterway—has triggered a global energy supply shock, pushing up gasoline prices, fueling inflation, and raising concerns about oil reserves.
"The president always prefers diplomacy, but he keeps all options on the table to ensure Iran never obtains a nuclear weapon," White House spokesperson Anna Kelly said in an email.
Even those who believe diplomacy remains a viable path to peace acknowledge the Strait's future is a thorny issue.
"There still seems to be a fundamental disagreement over the fate of Hormuz: Iran wants to charge a service fee, while the US wants to restore the pre-war status of the Strait as international free waters," said Claudio Galimberti, partner and chief economist at Rystad Energy, in an email.
Bessent and Trump Signal a Deal is Close
The oil market is eagerly awaiting any sign of progress on reopening the Strait. Treasury Secretary Scott Bessent injected a wave of optimism on Tuesday morning, telling the media that a deal ensuring "freedom of passage" could be reached within hours.
"We are negotiating with the Iranians," Bessent said. "We could potentially have an agreement today or tomorrow to open the Strait and move toward normalization in this conflict."
Following Bessent's comments, oil prices fell sharply, while stocks rallied and Treasury yields declined, with investor optimism coinciding with an AI-driven tech stock rebound.
However, crude oil prices remain well above pre-war levels, as traders oscillate between hopes for a lasting solution for the Strait and preparations for potential US military escalation.
The market is "still caught in the chaotic dynamics of extreme volatility," said Bob McNally, president of Rapidan Energy Group, in a media statement.
"While Iran and Oman might agree on a narrow Hormuz management plan, we believe the broader, lasting solution between the US and Iran needed for Strait normalization—and what the crude oil market wants to see—will not materialize," he said.
Despite this, Bessent's remarks boosted an already optimistic outlook, following Trump's Sunday night announcement that he was canceling a massive attack on Iran because "the framework of an agreement has been finalized."
This statement—similar to previous instances where he threatened decisive action against Iran but then backed down—lifted stocks on Monday, with the Dow Jones Industrial Average surging to a record closing high.
Trump further fueled the rally on Tuesday evening, saying a deal to reopen the Strait could be "reached" as early as Wednesday or Thursday, as "a lot of progress has been made."
Although he extended the timeline for a potential deal set by Bessent, Trump's comments continued to raise investor expectations on Wednesday, with the Dow hitting another record close, while oil prices remained steady.
Iran Contradicts Trump
The stock market's strong momentum was not deterred by Iran's repeated assertions that it is not actively negotiating with the US.
Instead, Iran stated it is negotiating with Oman—another major regional power bordering the Persian Gulf—to finalize its own agreement on Strait shipping.
Trump angrily insisted that US-Iran talks are ongoing, despite Iran's "disingenuous" denials. He also continued to claim that the US, which has reimposed a maritime blockade on Iranian ports in the region, has full control over the Strait. However, vessel traffic remains far below pre-war levels, when 20% of the world's oil transited through the waterway.
By Thursday, any expectation of an imminent Strait deal appeared to have at least temporarily faded, as Iranian state media reported a draft plan that would block US and Israeli ships and impose other restrictions.
The Trump administration quickly seemed to reject that draft as unacceptable.
"Any temporary passage would have no barriers—meaning no approval or permits, and no tolls or fees," a US official said in response to the report. "The Strait of Hormuz is an international waterway, and no single party can control the channel or the ability to transit it."
When asked Thursday afternoon at the White House if a deal to reopen the Strait had been reached, Trump said, "I don't want to say it's reached. It's kind of open now."
"I think we're doing well," Trump added. "I've been involved in the negotiations. I think we're making good progress… probably soon."
Iran, which has maintained an aggressive and confrontational stance toward the US throughout the war, mocked Trump's remarks.
"'Massive attack is coming… oh wait, never mind, they want to negotiate.' This is a cyclical drama of diplomacy," wrote Iranian Parliament Speaker Mohammad Bagher Ghalibaf on the X platform on Thursday afternoon.
"Using bullying + betrayal + fake news as leverage is a failed strategy," Ghalibaf wrote.
A Deep-Rooted Optimism Bias
As the war enters its sixth month, with reports of dwindling oil and critical ammunition stockpiles, analysts are questioning how long the market can continue to react to hopes of a pending deal.
"The cycle of headline-driven price corrections might lead people to believe the economic costs of the conflict are manageable," but the declining US Strategic Petroleum Reserve suggests "the global buffer capacity is weakening," RBC wrote in a strategy report on July 28.
Rapidan's McNally warned that oil prices could rebound to peak levels if "both sides fail to contain military escalation, or if persistent inventory drawdowns dissipate the market's deep-rooted optimism bias and force prices to demand containment."
Rystad's Galimberti told the media: "My gut feeling is that if they want to avoid a costly stalemate and don't want oil prices to quickly rebound to April levels or higher, with minimal Iranian oil flows, then they need to start bridging their differences and moving their red lines toward the middle."
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