The market is "volatile" between two narratives: "The war will end soon" vs "The Strait of Hormuz will remain closed for a long time"

Crude oil markets experienced a “storm of information” on Tuesday, with conflicting signals from both bulls and bears. From the release of U.S. strategic petroleum reserves to statements from Iran’s president, from the risk of Strait of Hormuz blockade to Trump claiming the war is “nearly over,” oil prices reversed multiple times within a single day, ultimately closing up about 5%.

JPMorgan traders noted that the day’s headlines supported two starkly opposing market narratives: one of de-escalation and stabilization of oil prices as an “exit route,” and another of the long-term risk of a continued closure of the Strait of Hormuz.

The market swung wildly between these two views, with oil volatility temporarily rising near last Sunday night’s highs. Persistently high oil prices continued to pressure equities, with the S&P 500 closing lower for the day. Bond markets also saw sell-offs, with yields rising by 5 to 8 basis points across the board.

The situation further intensified after hours. Reports of an explosion on a tanker in the Persian Gulf pushed oil prices higher while stocks declined, quickly dismantling the brief “decoupling” of stocks, bonds, and oil prices seen at the close.

Bullish signals: Iran releases conditions for ceasefire, reserves release boosts sentiment

JPMorgan traders pointed to a key positive signal at 2:15 p.m. — Iranian President Pezeshkian tweeted that the ceasefire depends on the U.S. and Israel promising not to launch future strikes. JPMorgan views this as the market’s long-awaited “exit strategy” signal from Iran.

According to CCTV News, on the evening of March 11, Iranian President Pezeshkian stated on social media that the “only way” to end the current war provoked by the U.S. and Israel is to recognize Iran’s legitimate rights, pay war reparations, and have the international community provide firm guarantees against future aggression.

Meanwhile, IEA member countries announced an agreement to release 400 million barrels of oil reserves, easing supply concerns to some extent through coordinated global action. Trump also made several dovish statements that day:

He claimed at 9 a.m. Eastern Time that “the war with Iran is nearly over, Iran has almost nothing left”;

At 12:15 p.m., he said U.S. forces had destroyed nearly all of Iran’s mine-laying ships;

At 12:30 p.m., he urged oil companies to use the Strait of Hormuz;

At 1 p.m., he promised to provide “full security guarantees” for oil tankers passing through the Strait.

These statements repeatedly pushed oil prices lower in the short term, reflecting market expectations of de-escalation.

Bearish signals: Ongoing bombings, Strait escort coordination may take weeks

However, bears also have strong arguments. JPMorgan traders pointed out that military strikes in the Middle East are ongoing — Defense Secretary Hegseth claimed that Tuesday saw the most aircraft and bombings of the entire conflict. Large-scale bombings over Israel and Lebanon in the afternoon pushed prices to the day’s high.

French President Macron’s comments also weighed on the market. He said coordinating escort ships through the Strait of Hormuz “will take weeks,” and that the Strait remains “too dangerous” for U.S. naval escort at present.

According to Xinhua News, Macron stated on the 11th that amid current tensions in the Middle East, G7 members should coordinate actions to restore safe navigation through the Strait of Hormuz as soon as possible. French media quoted Macron saying that, based on intelligence from France or its partners, he cannot confirm Iran has laid mines in the Strait.

Additionally, reports indicated that the FBI issued a warning that Iran might launch drone attacks on California. Following this, oil prices surged while stocks declined. After hours, the explosion on a Persian Gulf tanker further heightened the risk of supply disruptions, tilting the balance of risks further toward the bearish side.

Extreme tail risk: Short squeeze on the right side imminent

Despite the current bearish sentiment, Goldman Sachs partner John Flood warned in an interview that there is also a significant upside risk. He noted that hedge fund leverage is near historic highs, mainly driven by continued short positions in macro products (indices and ETFs).

According to Goldman Sachs commodity brokerage data, the proportion of macro product short exposure relative to total U.S. market cap is at its highest since September 2022, ranking in the 93rd percentile over the past five years.

“Once headlines announce the end of the conflict, indices could surge sharply,” Flood said, “potentially jumping 2% to 3% in a straight line, mostly driven by short covering in macro products.”

Meanwhile, market liquidity is thinning, with ETF trading volume accounting for over 35% of daily market turnover for seven consecutive days — approaching the 10-day record set during the COVID-19 pandemic in 2020. Flood warned that reduced liquidity could further increase volatility in the coming weeks.

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