Iran conflict drags on as Trump rejects peace offer; oil soars

The US-Iran conflict entered a new phase of brinkmanship this week as both sides rejected each other's peace proposals. Trump called Iran's response 'totally unacceptable,' citing unreasonable demands for sanctions relief and control of the Strait of Hormuz. Iran countered that it sought only recognition of its sovereignty and a guarantee against future attacks. The standoff means the crucial waterway remains effectively shut, blocking shipments of oil, LNG, and other cargo.

Oil futures spiked in response, with WTI and Brent climbing as traders priced in a longer conflict. Saudi Arabian crude exports to China are set to plunge to 13-14 million barrels in June, signaling supply tightening. Qatar managed to ship an LNG cargo through the Strait, a rare bright spot, but broader energy flows remain severely curtailed. Aramco warned of prolonged market disruption, and refiners globally are scrambling to find alternative sources and routes.

The spillovers are now visible across multiple asset classes. India's Prime Minister Modi urged citizens to cut fuel use, avoid overseas travel, and pause gold purchases to preserve foreign-exchange reserves; jewelry stocks fell in response. The rupee faces pressure to 98 per dollar by year-end. China's car sales plunged 21.5% in April as gasoline-vehicle demand cratered, though EVs offset some losses. UK gilt yields rose on concerns over Starmer's leadership and inflationThe rate at which prices rise across an economy. from energy costs. The ECB is now expected to hike rates twice in 2026 as Iran-war inflation spreads across the eurozone.

There is genuine debate about how long this can last. Pimco's Dan Ivascyn warned the Fed may need to raise rather than cut rates if oil stays elevated. But some traders note that physical oil buying has cooled as buyers step back from bidding wars, and alternative supply routes are gradually opening. Trump's upcoming Beijing summit with Xi may still yield backchannels to de-escalate; China has not yet acted as a pressure mechanism on Iran, suggesting room for negotiation.