The US-Iran conflict, now in its sixth week, is entering a new phase where the focus may shift to the negotiating table. Former President Trump has indicated that talks between the US and Iran could resume within the next two days. While significant differences in positions and a lack of mutual trust remain, the mere fact that negotiations are continuing is viewed positively, as it at least prevents a further escalation of tensions. However, given the stalemate on the ground, the negotiation process is expected to be protracted and challenging.
Simultaneously, trilateral talks involving Israel, Lebanon, and the US have concluded, with Israel and Lebanon set to begin direct negotiations. This suggests Israel is shifting its focus from Iran to Lebanon, aiming to consolidate its strategic gains against Hezbollah and establish a defensive buffer zone. These developments indicate that all parties involved are seeking pathways to de-escalate the conflict.
Short-term risks to crude oil supply remain difficult to alleviate. Since the conflict began, international oil prices have been highly sensitive to geopolitical developments, significantly influencing the trajectory of various asset prices. A US-led "second blockade" of the Strait of Hormuz poses major challenges for Iran's oil and goods imports and exports but is not expected to worsen the global energy trade environment further. The number of vessels passing through the strait daily has fallen to single digits since the conflict started, resulting in a loss of over 10 million barrels per day from global crude supply. Markets have largely priced in this supply risk, while alternative export routes utilized by Gulf states have helped prevent a sustained surge in international oil prices.
As negotiations proceed and tensions cool, can global crude supply return to its pre-war state of surplus? Traffic through the Strait of Hormuz is unlikely to fully recover to pre-war levels, potentially reducing global crude trade volumes and increasing transportation costs, including tolls, freight, insurance, and security. Even if the strait reopens fully, the energy infrastructure and production capacity damaged in Gulf states will require a much longer time to restore.
The International Energy Agency's monthly report, released on Tuesday, significantly revised its 2026 global crude supply forecast from an increase of 1.1 million barrels per day to a decrease of 150,000 barrels per day, describing it as the largest supply disruption on record. Concurrently, the 2026 global oil demand forecast was adjusted down from growth of 640,000 barrels per day to a contraction of 80,000 barrels per day. Overall, the projected supply surplus for this year has been reduced from 2.46 million barrels per day to just about 410,000 barrels per day, and these figures represent only a baseline scenario.
In the oil market, spot prices remain above futures prices, indicating a significant decoupling. A positive sign is that the futures market's contango price curve suggests traders anticipate lower oil prices in the future. The contract for December this year is currently near $75, while the December 2027 contract is at $70, still above the pre-war range of $55-$65.
Prolonged high oil prices pose risks to inflation and economic outlooks. The IMF has lowered its 2026 global economic growth forecast by 0.2 percentage points to 3.1%, a projection based on an average oil price of $82. The Atlanta Fed has also reduced its Q1 US economic growth estimate from 3% at the end of February to 1.3%.
Despite a lack of substantive progress in ceasefire talks, unresolved concerns over AI spending and market panic, uncertain prospects for interest rate cuts, liquidity warnings, and looming risks of inflation or even stagflation, the S&P 500 and Nasdaq indices have achieved a ten-day winning streak. They have not only recovered all losses incurred since the conflict began and for the year but are also approaching their historical highs.
Beyond the cooling geopolitical risks, reasonable valuation levels and strong earnings expectations have provided investors with additional confidence and buying opportunities during dips. A Reuters survey indicates that S&P 500 index earnings for the first quarter are expected to increase 13.9% year-on-year, with full-year earnings growth projected at 19%, even higher than the pre-war forecast of 15%, suggesting underlying fundamentals remain robust.
Notably, software stocks have shown signs of recovery during this rebound. If upcoming earnings reports from tech companies in the following weeks provide optimistic results and guidance, it could reignite market enthusiasm. Compared to the market movement in April last year, the Nasdaq's decline before this recent rebound was relatively limited, characterized by an extended period of sideways movement, and recent trading volumes have not increased significantly, which raises some doubts about the sustainability of the rally.
If the Federal Reserve were to signal potential rate cuts or adopt a dovish stance at its April 29th meeting, providing additional liquidity, it could potentially alleviate current concerns and propel the indices higher, though this outcome is currently considered unlikely. Conversely, if the indices fail to break to new highs convincingly, the risk of a pullback from overbought conditions may gradually increase.
The US Dollar Index has declined for seven consecutive days, falling below its 200-day moving average and approaching a key support level near 98, which aligns with a long-term trendline. The dynamic of "fighting while talking" between the US and Iran may become the norm, suggesting the Dollar Index could oscillate within a 98-100 range in the short term. However, if Iran ultimately maintains a toll system for the Strait of Hormuz or gains initiative on other issues, it could undermine the foundation of the "petrodollar," posing a downside risk for the index.
For gold, a three-week rally and a strong bullish candlestick pattern on Tuesday indicate the upward trend remains intact. As long as the price holds above the $4730/65 support zone, a bullish outlook is warranted. The initial target is near the 50-day moving average around $4900/20, which coincides with the 61.8% Fibonacci retracement of the March decline. A break above this level could pave the way for a move towards the $5000-$5100 area. The long-term bullish thesis for gold remains unchanged.