Following the conclusion of U.S.-Iran negotiations, tensions in the Strait of Hormuz have escalated, driving international crude oil prices to surge once again. However, panic-driven trading in the market has substantially decreased.

Currently, the crude oil market continues to experience frequent shifts between ceasefire rumors and renewed conflict. Despite this, market sentiment has clearly receded, with implied volatility in the options market showing a notable decline. Notably, the crude oil options volatility index (VIX) has nearly halved, dropping from a peak of 121.27 on March 13 to a low of 68.78 by April 13.

Although panic trading is fading, the high interest rates resulting from elevated oil prices are likely to persist for longer than initially anticipated. Recent market expectations indicate that the long-term U.S. interest rate benchmark has shifted upward from the 2%–2.5% range to 2.5%–3%.

Buyers of options have reduced their panic hedging activities. The world’s largest oil trader, Vitol, recently made headlines when it was revealed that a team led by a star trader suffered losses amounting to hundreds of millions of dollars due to incorrect directional bets on the oil market at the onset of the U.S.-Iran conflict. Following this news, discussions surged in domestic futures markets. Several experienced traders noted that, in the current environment, position sizes in crude oil and its downstream products are being scaled back, with short-term positions often being closed by the end of the day to minimize unexpected losses from market volatility.

One industry veteran pointed out that international crude oil markets experienced a liquidity crisis in March. During the first ten days of the U.S.-Iran conflict, the absence of clear expectations regarding U.S. follow-up actions, combined with uncertainty over Iran’s retaliatory capabilities and control over the Strait of Hormuz, led to uncontrolled price surges. This situation effectively forced the unwinding of numerous trading positions. Hedgers in the crude oil market were particularly affected, facing multiple rounds of margin calls and forced liquidations. Liquidity risks also spilled over into foreign exchange and commodity markets, causing temporary shortages in short-term U.S. dollar funding due to margin-related pressures.

Data shows that the U.S. dollar index rose by 2.29% in March, repeatedly breaching the 100 mark. However, as the market grew desensitized to the back-and-forth between ceasefire rumors and renewed hostilities, trading sentiment noticeably cooled, and implied volatility in the options market declined significantly. Volatility metrics indicate that, even as spot prices remain influenced by geopolitical fluctuations, implied volatility in options has begun a broad-based reversion to the mean. Market reactions to geopolitical news have become increasingly muted, with options buyers scaling back panic hedging and risk aversion sentiment weakening.

A clear example is the significant drop in volatility within the energy and chemical sectors. Although implied volatility remains at relatively high levels, it has gradually moved away from extreme ranges, showing a distinct trend of mean reversion. In addition to the crude oil VIX, the liquefied natural gas options volatility index also fell, from a high of 86.91 on March 24 to a low of 52.81 by April 13.

Despite the decline in volatility for crude oil and its derivatives, their impact on capital markets continues. Bond-focused private fund Zenlong Asset Management noted that the sharp rise in crude oil prices during March pushed up bond yields globally and significantly affected the positions of certain hedge funds. Analysis by some international investment banks suggests that two rounds of rapid selling pressure on U.S. Treasuries during Asian and European trading hours, starting in the second week of March, may have been triggered by the liquidation of certain investment products.

Data further reveals that long-term interest rates in several countries reached multi-year highs in March. For instance, rates in the UK and Germany hit three-year highs, while Japan’s reached an 18-year peak. Zenlong Asset Management observed that, in earlier periods such as 2008 or 2012, central banks might have coordinated efforts to inject liquidity and restore market confidence. However, financial markets do not operate in isolation from the international political environment. Should regional protectionism intensify, the policy safeguards previously familiar to markets may be abandoned altogether.

Meanwhile, recent market expectations suggest that the long-term U.S. benchmark interest rate has risen from the 2%–2.5% range to 2.5%–3%. This shift implies two key takeaways: first, expectations for interest rate cuts have been pushed further into the future; second, there are indications that the Taylor rule may no longer serve as a reliable guide. As a result, the high interest rate environment is likely to persist longer than originally anticipated.

In a recent report, Michael Hartnett, a well-known strategist at Bank of America, highlighted that a series of deep structural shifts—including the Federal Reserve’s move from independence to accommodation, the transition of AI development from competition to disruption, and the U.S. economy’s shift from services to manufacturing, coupled with dollar depreciation and global fiscal overexpansion—have positioned commodities as essential tools for asset allocators seeking to hedge against risk and inflation.