Oil surges as Trump rejects Iran peace talks; war risk premium persists

The Iran-US war, now in its second month, entered a critical juncture when Trump publicly rejected Iran's latest ceasefire proposal via social media, calling it 'totally unacceptable' and signaling further military pressure. The immediate market reaction was sharp: oil futures spiked, equity futures fell, and risk assets sold off as traders repriced the probability of a prolonged conflict choking the world's most crucial energy corridor.

Aramco warned of long-term market disruption, while Qatar confirmed its first LNG shipment through the Strait since the war began, providing modest relief. However, the physical oil market remains fragile. According to reports, buyers are stepping back from near-record cargo bidding seen in April, suggesting complacency is creeping in despite the strategic chokepoint remaining closed. Modi appealed to Indians to conserve fuel and avoid gold purchases, a signal of how acutely Asia's energy importers fear prolonged supply shortages. China's factory inflationThe rate at which prices rise across an economy. hit post-Covid highs as the oil shock cascaded into input costs, forcing Beijing to cushion the blow via strategic reserves and renewable energy diversification.

The geopolitical dimension adds uncertainty. Trump is scheduled to meet Xi Jinping in Beijing May 13-15, and the summit agenda now includes pressure on China to lean on Iran to reopen the strait. However, Beijing's appetite to act as a pressure mechanism remains unclear, and some analysts see the conflict as an opening for Chinese economic gains. The European Central Bank is expected to hike rates twice in 2026 as the war drives inflationThe rate at which prices rise across an economy. higher, creating a policy dilemma: growth is threatened by the supply shock, yet inflation forces rate action.

Key risk: if the war escalates further or spreads to include broader regional actors, oil could spike to levels that trigger demand destruction and recession fears.