Never bet against Donald Trump. Oil market made a bet from the first day of the Iran War: the U.S. president would not let the conflict spiral into an economic crisis. The traders would not price in a single barrel, regardless of what happened with physical supplies.

The risky decision proved to be correct.

Oil prices certainly swung during the three-and-a-half-month war, as Iran's key weapon was the unprecedented closure of the Strait of Hormuz. Tehran was able, overnight, to cut off a quarter of the world’s oil and liquefied gas supplies. This gave them significant leverage.

Benchmark Brent crude soared from $70 per barrel to $118 a barrel in late March before falling back to $83 a baril after Washington and Tehran announced an initial deal on Sunday.

These moves were remarkable given that this supply disruption was the largest of modern times.

Imagine that the price of oil soared to $123 per barrel after Russia invaded Ukraine on a large scale in February 2022. The market was concerned about the disruption of Moscow's oil sales, which totaled around 7.5 millions barrels per day in the previous year. This is about half of the volume that was lost due to the blockade in Hormuz. Since decades, the oil market has been dreading a Hormuz shut down. When it happened, the prices rose, but did not spiral.

Bend, but don't break

The explanation is simple: the physical markets did their job. The global energy system showed extraordinary flexibility and resilience. The governments and companies released hundreds millions of barrels of oil from strategic and commercial stockpiles. They were fortunate that production was booming before the conflict and inventories rose quickly, helping to cushion the blow.

The demand also changed. As soon as the war began, Chinese imports dropped sharply and governments across Asia imposed energy consumption limits to reduce energy consumption. This helped to prevent a more severe economic shock.

The system bent but did not break.

This is not the whole story.

TRUMP PUT

If you look closely, the market's reaction to the decline in global inventories is quite different.

According to the U.S. Energy Information Administration, stocks were depleted in a war-like manner, with an average of 5.3 millions bpd falling between March and may. The stocks were at dangerously low levels as the northern hemisphere entered peak summer demand.

This should have been an alarming flashing red light. It appeared that it was a sign of confidence in a possible deal.

What is the answer to this question?

Trump was not going to let things deteriorate so far that gasoline prices in the United States would reach unmanageable heights and ignite inflation. This is especially true with midterm elections approaching. Investors believed that he wouldn't blink until the market crashed.

The lower the inventories, the more likely a deal appeared.

This pattern is familiar.

During Trump’s second term, the markets have learned to discount extreme outcomes implied in his rhetoric and first policy moves. This includes tariffs as high as $1,200 per ton announced on “Liberation Day,” attacks on Federal Reserve Independence, or threats of taking over Greenland.

Once the financial markets started to wobble, his most aggressive moves were always followed by retreats.

But the so-called Trump put is not just for equities. It also influenced commodity markets during the Iran War.

The markets weren't ignoring risks. The markets were pricing Trump's limitations.

You can only go so far

The "Trump trade" on the oil market has its limits.

Contrary to equities which can be influenced by sentiment over long periods of time, commodity markets are rooted in physical reality. Reality was catching up to the president and traders of energy.

The loss of 1.4 billion barrels since the beginning of the war has still left a huge hole in the global inventory. This gap has not been closed.

The?deal' announcement has reduced the risk of an oil price spike - which was only sounded two weeks ago.

It is clear that the supply and demand will not?recover in lockstep, which could lead to a period?of volatility.

Demand could increase.

Refiners and traders, as well as governments who depleted their inventories in the wake of the crisis, will need to replenish them. This will lead to a new demand wave that could cause markets to tighten as the summer peak demand and the supply buffers are thin.

The strain in the United States is already evident. U.S. crude stocks have dropped to their lowest levels since 2004 after the crisis pushed?exports up to record highs. Gasoline stocks are also at their lowest level since 2014.

A glut of Gulf producers battling to gain market share could lead to a faster recovery in supply than most expect. The price could drop more than traders currently expect.

TRADE THE TRUMP

Trump's constant hammering on oil markets has been effective throughout the war. It has repeatedly raised investor expectations of a rapid resolution, even when conditions on the ground deteriorated.

Washington's gains from the U.S. Iran deal, announced on Sunday, were limited and vague. It arrived at a time when the market was beginning to run out of space. Its timing was probably not coincidental.

Investors knew that Trump had a limit to his tolerance of market pain, and these limits were as important as the pipelines, tanks and storage tanks.

They bet. They were right this time.

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(source: Reuters)