Oil surges as Trump rejects Iran peace proposal

The fragile ceasefire between the US and Iran has fractured as negotiations hit a dead end. On Sunday, Trump called Iran's response to his latest peace proposal TOTALLY UNACCEPTABLE on Truth Social, citing unreasonable demands for immediate war cessation, sanctions relief, and control over the Strait of Hormuz. Iran's Foreign Ministry countered that the US position was equally rigid. The rejection triggered an immediate sell-off in risk assets and a spike in crude prices, with WTI and Brent both surging as markets priced in a protracted closure of the critical shipping chokepoint.

The collapse of negotiations has real economic consequences. Qatar sent its first LNG tanker through the Strait in weeks, signalling some traffic resumption, but the broader energy complex remains fractured. Aramco warned of long-term disruption to the oil market, and Saudi refiners are operating at reduced rates. In India, PM Modi appealed to citizens to cut fuel consumption, limit gold purchases, and work from home to preserve foreign-exchange reserves. China's refinery run rates have come under pressure, with private refiners seeking government approval to reduce output after earlier directives to maximize production. Energy inflationThe rate at which prices rise across an economy. is now feeding into broader CPI expectations; the ECB survey shows officials expect two rate hikes in 2026 as Iran-war inflation spreads.

The geopolitical standoff is creating winners and losers. European oil majors (Shell, BP, TotalEnergies) have profited from trading volatility, capturing up to $4.75 billion in trading desk gains. Energy-importing nations like India and the Philippines face currency depreciation and margin compression on imports. Emerging market equities have risen anyway on AI sector enthusiasm, masking underlying stress. The yen weakened further despite Japanese intervention, as energy costs force policy reassessment. Meanwhile, Trump is scheduled to meet Xi in Beijing this week (May 13-15), where he is expected to pressure China to use its influence with Iran to reopen the Strait. Beijing has played a cautious hand so far, signalling limited appetite to bend Iran to US will.

The risks cut both ways. An escalation toward military strikes could crash equities despite energy price spikes; a surprise breakthrough would crater oil and erase a key inflationThe rate at which prices rise across an economy. narrative. Markets are vulnerable to headline shocks, with dealer gammaThe rate of change of delta - the option's curvature. at record highs, meaning sharp reversals could trigger cascade selling or squeezes.