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 the physical supply.

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 gained significant leverage when it was able 'to choke off a 5th of the worlds oil and gas supplies over night.

Benchmark Brent crude soared from $70 per barrel to $118 a barrel in late March before slipping back to $83 a barrel 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, DON'T ?BREAK

The explanation appears simple: the physical markets did their job. Global energy systems showed extraordinary resilience and flexibility. 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. This helped cushion the blow.

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

The system bent but did not break.

But that is only half of the story and not even the most important.

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 dangerously close to low levels, just as northern hemisphere summer demand was peaking.

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

What is the explanation?

It was obvious that Trump would not allow the situation to worsen to the point where U.S. gas prices would soar to unmanageable heights and risk reigniting inflation in general, especially as midterm elections were looming. Investors believed that he wouldn't blink before the markets cracked.

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 the physical world. 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 hasn't?disappeared.

The deal has reduced the likelihood of a huge spike in oil price - which was warned about only two weeks earlier.

It is clear that the supply and demand will not recover in a timely manner, which could lead to 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 supply buffers are thin.

The strain in the United States is already evident. After pushing exports to records levels during the crisis U.S. crude stocks have fallen to their lows since 2004 while gasoline inventories are at their lows since 2014.

The supply could recover quicker than expected as Gulf producers, who are battling to gain market share despite a lack of revenue, scramble for it. The price could drop more than traders currently expect.

TRADING TRUMP

Trump's constant hammering on oil markets has been effective throughout the war. It has repeatedly raised investor expectations of a quick solution, even when conditions on the ground were deteriorating.

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 closing in. 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)