Key Takeaways
- Near-term geopolitical risk has moderated – a broader agreement or extension of the ceasefire seems likely.
- Oil markets are pricing in reduced supply disruption, but oil futures suggest some geopolitical risk premium remains embedded.
- Lower oil prices support the macro backdrop with concerns around inflation and growth easing.
- Equities remain supported by resilient fundamentals and continued enthusiasm around artificial intelligence.
- The outlook has improved, but risks remain.
Investor sentiment has improved as markets assess the possibility of further de-escalation between the US and Iran – whether through a broader agreement or an extension of the ceasefire. This change in tone has been reflected most clearly in the price of oil. Brent crude fell by around 11% last week and was down almost 19% over May, recently trading near $93 a barrel. Futures pricing suggests some geopolitical risk premium remains embedded, with December contracts around $85 a barrel and December 2027 contracts closer to $77. Even so, the move lower indicates that markets are placing greater weight on a scenario in which immediate supply risks begin to recede.
This matters for broader markets because lower oil prices reduce the risk that the conflict has on inflation or growth expectations. Equity markets, supported by resilient earnings and continued enthusiasm around AI-related investment, appear to be discounting a scenario in which disruption proves manageable and economic activity remains relatively stable. At the same time, however, oil prices are still well above the levels many investors anticipated at the start of the year, when expectations of ample supply pointed to a lower trading range. Longer-term structural issues also remain in place, including ongoing energy transition challenges and only partial relief from recent inventory drawdowns.
For now, markets appear willing to look through near-term headline volatility, reflecting a view that both sides may be moving towards a more durable framework. The recent fall in oil prices is consistent with that interpretation. However, the situation remains fluid, and the path to a lasting resolution is unlikely to be straightforward. Should negotiations stall or fail to deliver a more durable outcome over the coming months, supply concerns could re-emerge and reintroduce pressure on energy markets. On balance, the near-term backdrop has improved, but it remains appropriate to expect further volatility as developments unfold.
