Chang'an Futures Fan Lei: Negotiations are delayed, and geopolitical risks may need to be avoided

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Recently, the volatility of crude oil prices has decreased slightly compared to the first two weeks of the U.S.-Iran conflict, which has led to a relative decline in the volatility level of oil prices. However, it has stabilized around 90% recently, which actually means that despite a slight slowdown in oil price fluctuations in the short term, the market remains cautious about changes in the geopolitical situation. From the recent developments in U.S.-Iran geopolitics, there are several focal points worth paying attention to:

1. There is still a possibility of military escalation.

After key infrastructure in Iran was attacked, the South Pars gas field was targeted for the first time by Israeli forces, marking a substantial breakdown of the long-standing implicit rule of "strategic immunity" for energy facilities in international conflicts. Although recent statements from the Trump administration indicate that, at the request of the Iranian government, the attacks on Iranian energy facilities have been postponed by 10 days to April 6, and the negotiations between both parties are progressing smoothly, what we are actually witnessing is a continued high-frequency and extensive mutual bombing activity between Iran and Israel. Previously, Trump issued a 48-hour ultimatum on March 21, threatening to destroy Iran's power plants if Iran did not open the Strait of Hormuz, and subsequently mentioned on March 23 and March 26 that the attacks on Iranian energy facilities would be postponed by 5 days and 10 days respectively.

Although this statement has been confirmed recently, the U.S. has not chosen to go back on its word and strike Iran in the short term. However, it is worth noting that there are widespread reports in the market suggesting that this is a "stalling tactic" by the U.S. to seize Hark Island. According to a Wall Street Journal report on March 26, the Pentagon is considering deploying up to 10,000 ground troops to the Middle East, including infantry and armored vehicles, to "provide Trump with more military options." Currently, the U.S. 31st Marine Expeditionary Unit and the 11th Marine Expeditionary Unit have already departed from Japan and California, totaling nearly 5,000 personnel. The former is expected to arrive near Iranian waters this weekend, while the latter will be delayed by about a week, subtly dividing the timing of the action between the negotiation beginning this weekend and early April. Additionally, the 82nd Airborne Division and a combat brigade of nearly 3,000 personnel have been put on standby at the Pentagon's order and may also deploy at any time. From the above military deployments, it is evident that there remains a possibility of an "unhappy ending" in the ongoing negotiations between the U.S. and Iran, meaning that in the short term, the market still cannot relax its anxiety over the potential escalation of conflict.

2. Shipping capacity in the Strait remains difficult to recover.

It is not difficult to see from the path of impact on commodities since the conflict broke out that the most strongly affected commodity by the current U.S.-Iran conflict is crude oil. The impact on oil prices is reflected both in the inability of oil-producing countries in the Middle East to smoothly transport resources to global consumption areas and in the actual reduction of output by Gulf States. Regarding the former, the interruption of shipping capacity in the Strait of Hormuz directly means a loss of about 15 million barrels/day in oil export capacity. Although there have been sporadic reports of oil tankers successfully passing through the Strait, the loss in quantity is undeniable, and this factor has a direct upward effect on oil prices, which is also the core reason why oil prices have been difficult to show a significant decline recently. According to real-time data from the Automatic Identification System (AIS), the number of vessels anchored in the Gulf of Oman and the Persian Gulf has reached 2,875, with 2,381 vessels either anchored or docked. Even though recent statistics and agencies have reported that several tankers have passed through the Strait, this is merely a drop in the bucket for the global market, especially for Southeast Asia.

Meanwhile, although Trump publicly stated yesterday that an agreement has been reached with Iran, allowing 10 tankers to pass, the same reasoning applies: this statement has not been effectively implemented. Furthermore, Iran publicly declared on the 22nd that the Strait of Hormuz is not completely closed, and countries not participating in the conflict against Iran can pass through with coordination from Iran. Does this mean that Iran is using this as leverage, transforming the right of passage into a geopolitical bargaining chip to demand concessions from the U.S. for energy shipping capacity? It should be noted that the shortest distance across the Strait of Hormuz is only 30 kilometers, and even if the U.S. claims to have destroyed "90% of Iran's ammunition reserves," this distance can easily be covered by a short-range ballistic missile—meaning that as long as Iran retains even 10% of its undestroyed precision guidance capabilities, its actual deterrent power over the Strait remains intact.

3. The possibility of successful negotiations.

The core focus of the market recently has been whether the subsequent negotiations between the U.S. and Iran will yield good or bad results, whether the Middle East situation will cool down or escalate into island grabbing. However, there is currently a very obvious "Rashomon" phenomenon regarding U.S.-Iran negotiations: there are significant discrepancies between the U.S. and Iran regarding whether negotiations have taken place and the outcomes, yet Pakistan, as a mediator, has indirectly confirmed the objective existence of negotiations.

From previous reports of ceasefire proposals, the U.S. has put forward 15 conditions requiring Iran to not only completely abandon its nuclear capabilities but also to stop supporting armed allies in the region. In exchange, Iran could obtain complete exemptions from international trade sanctions. This was actually analyzed in our report titled "The Middle East Crisis and Commodity Market Interpretation—Special Report on U.S.-Iran Conflict" published in the first week of the conflict on March 3. Iran finds it difficult to make concessions on both points; losing either one means that Iran will face severe developmental challenges in the future. On the other hand, Iran has publicly denied any negotiations and demanded compensation from the U.S. while insisting on retaining control over the Strait, with no additional mentions of nuclear capabilities. Thus, it is evident that there remain clear conflicts in the demands of both parties in this conflict, making it very difficult for them to achieve effective outcomes in negotiations.

Stepping back for a moment, the current "Rashomon" situation in negotiations may not be a matter of information asymmetry but rather a political game. The U.S. publicly expresses, "I have offered a peaceful resolution," while Iran's public rejection does not necessarily mean that the U.S. can proceed to take further military action based on this. This method of coercing an opponent to act based on the outcome is not unfamiliar to the U.S.; for example, during the "Desert Shield" operation prior to the Gulf War in 1991, the U.S. used the "peace negotiation window" to complete the mobilization of multinational forces. Similarly, before the Iraq War in 2003, the Bush administration continued to pressure the UN Security Council while simultaneously advancing military deployments. Particularly considering that, as mentioned in the first part, the U.S. is still actively mobilizing military forces for deployment in the Middle East, this factor makes Trump's latest postponement of strikes on Iranian energy facilities even more thought-provoking.

4. Subsequent developments and impacts.

In light of the above, it can be concluded that for both the U.S. and Iran, the military clashes over the past month since the conflict broke out have not changed their political demands and economic ambitions. In fact, one could say that both parties' objectives have been further solidified amid the conflict.

From the results, there are only two points: either the escalation of conflict leads to a complete blockade of the surrounding straits of the Persian Gulf, or the cooling of conflict unlocks shipping capabilities. Although the current situation indicates that under the leadership of the Islamic Revolutionary Guard Corps, Iran's diplomatic attitude remains tough, we cannot completely rule out the possibility of both sides reaching reconciliation later. For the former, the market reacted as early as the first week, with international oil prices showing a daily fluctuation of 20% and spot prices for Middle Eastern crude oil soaring to $155 per barrel. This suggests that as long as the conflict persists, oil prices are unlikely to decline from elevated levels, and there may still be upward momentum. For the latter, even if the U.S. and Iran shake hands and reach an agreement in early April, leading to a significant cooling of market sentiment, the backlog of tankers in the Persian Gulf and the earlier output reductions mandated by Gulf States are unlikely to be effectively restored in the short term. This means that a de-escalation of geopolitical tensions may not directly lead to oil prices fully recovering to pre-conflict equilibrium levels.

Based on the above conclusions, we assess that the market may have entered a "stalemate phase under high volatility." During this phase, most commodities in the market will experience increased volatility influenced by oil prices, but both the direction and amplitude of this volatility are difficult to define effectively. This suggests that unilateral positioning operations in the short term may struggle to effectively avoid systemic market risks. Although, in the long term, there will eventually be a day when the conflict cools down, the pace of recovery in absolute prices may also experience some delays. Therefore, in this context, investment in most commodity futures may require a robust hedging strategy for protection. At this time, whether utilizing arbitrage strategies with both long and short positions or employing options strategies under high volatility may be more favorable choices.

Author's Profile:

Fan Lei, analyst at Chang'an Futures, Master's degree, futures investment consulting license number: Z0021225, possesses a solid theoretical foundation and international perspective; since entering the futures industry, he has been dedicated to research and analysis in the macro and crude oil-related energy sectors as well as options, skilled at starting from fundamental analysis to build a commodity analysis framework in line with policy guidance theory, and insists on creating value for clients with professional knowledge and sincere attitude.



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Editor: Li Tiemin