West Texas Intermediate (WTI) crude is trading around $90.30 a barrel during Friday's Asian hours, giving back ground after posting gains of nearly 2.5% the day before. The reason is a social media post from President Donald Trump, who said the US is engaged in "productive discussions" with Iran and will refrain from attacking the country before the midterm elections. Traders took that as a sign that the worst-case scenario is off the table, at least until November. The calm looks fragile, though, because Washington has not eased its grip on Iranian ports.
A promise with strings attached
Trump said record volumes of crude are currently passing through the Strait of Hormuz, the narrow waterway that carries a large share of the world's oil. He also stressed that the US naval blockade of Iranian ports will remain fully operational. So the message was mixed: no attack for now, but no easing of pressure either.
Then came a second layer of doubt. Subsequent reports indicated the US had already prepared plans for three days of targeted strikes on Iranian energy infrastructure, drone and missile stockpiles, and other strategic sites. Plans are not orders, but they explain why the market's relief is cautious rather than confident. A pledge made for political timing can change quickly if events on the water change.
What drove Thursday's spike
The pullback follows a sharp rally on Thursday, when oil surged by as much as 5.6%. Two things pushed prices up at once. Tehran had intensified attacks on commercial shipping in the Strait of Hormuz, targeting nine vessels over the previous week. At the same time, Hurricane Isaias threatened offshore production in the Gulf of Mexico, forcing producers there to shut in about 1.3 million barrels per day of crude output. One shock hit the supply route and the other hit the supply source, so the move was fast.
Why bond markets care about oil
Scotiabank strategists point out that the energy flare-up is feeding straight into interest rates. In their words, "the impact on oil prices and global bond yields is clear, with WTI up $4/bbl on the day and trading back above $90/bbl as the US 10Y threatens fresh multi-decade highs above 5.35% nearing levels last seen in 2002." They describe it as a renewed test of investors' tolerance for higher yields when crude is rising again.
The link is easy to follow. Higher oil raises fuel costs and inflation expectations. Higher inflation expectations make it more likely that central banks keep raising rates, and that pushes bond yields up. That is why Friday's drop in oil matters beyond the energy market: it also takes a little pressure off yields.
What this means for Oil
Oil is now balancing two forces. On one side, Trump's pledge removes the immediate risk of a US strike and lets prices cool from Thursday's spike. On the other side, the blockade stays in place, the strike plans have leaked, and attacks on ships and hurricane shut-ins have shown how quickly supply can tighten. With US yields near multi-decade highs, any new spike in crude will also put pressure on other markets. Prices can slip while the pledge holds, but dips look fragile as long as the Strait of Hormuz and the Gulf coast remain exposed.
What traders should prepare for
Any new Trump statement on Iran, especially one that changes the "no attack before the midterms" message
Further attacks on commercial ships in the Strait of Hormuz, after nine vessels were targeted in a week
Updates on Gulf of Mexico production restarts after the shut-in of about 1.3 million barrels per day
US Treasury yields, with the 10-year near 5.35% and oil acting as a driver
The US blockade of Iranian ports, which Trump says will stay fully operational
Bottom line: Oil is giving Trump's pledge the benefit of the doubt, but with the blockade in place and strike plans reported, the market is trusting the promise only until something on the water says otherwise.