A Path Toward Negotiation
The current trajectory of the Iran conflict suggests that some form of agreement is on the horizon. The Trump administration appears to be actively searching for an exit ramp, signaling a willingness to be flexible on a wide range of issues in exchange for movement on a single, central concern. If the United States can secure a meaningful concession on the nuclear file, Washington appears prepared to grant Iran substantial concessions in return — including potential leniency around its ballistic missile program and even some degree of control over the Strait. The nuclear question, however, remains the immovable centerpiece. Tehran has signaled that its nuclear posture is not up for debate, which means the path to a deal runs through the most contested terrain. How the two sides bridge this gap will define the negotiations.
A Supply Shock on Top of a Supply Glut
The market entered this year with a remarkably comfortable supply outlook. Forecasts had projected an oversupply of roughly 1.5 to 2 million barrels per day, which created a meaningful buffer heading into the conflict. That cushion has proven critical, but it is rapidly being eroded.
Each week that the Strait of Hormuz remains effectively closed compounds the loss. By the end of May, the cumulative shortfall is on track to approach a billion barrels of lost supply. The implications stretch far beyond the immediate disruption: even if the Strait were reopened tomorrow, simply replenishing the lost output would require an additional 2 to 2.5 million barrels per day of supply above baseline demand sustained over a full year. In other words, the damage already done cannot be undone quickly. The market is now confronting an inventory problem that will linger well past any ceasefire.
Shipping data reinforces just how constrained the corridor has become. Before the conflict, the Strait of Hormuz handled more than 130 vessel transits per day. Now, the count is closer to 20 or 30. Iranian attacks on vessels beginning around April 18 effectively froze activity through late April, and although there has been a modest uptick since, the vast majority of ships currently moving are attempting to exit the region rather than enter it. The Middle East Gulf, for practical purposes, has become a one-way door.
Inflation Returns to the Bond Market's Attention
The energy shock has translated almost directly into a fresh inflation problem. In the second half of last year, oil was trading in the mid-$60s. Today, prices are hovering near $100, and that move is feeding through to consumer prices across a number of economies. Headline CPI in the United States has risen to 3.8%, but more telling is the core measure — which strips out food and energy — which has nonetheless ticked up to 2.7%. That pass-through from headline to core is the development that central banks cannot ignore.
The reaction in the bond market has been instructive. At the outset of the conflict, the front end of the curve moved sharply higher in both Europe and the United States, reflecting expectations of a more hawkish near-term response from central banks. Since the start of May, however, the action has shifted to the back end of the curve. That migration is significant: it reflects mounting concerns about more persistent inflation expectations rather than a short-lived spike. If the conflict drags on and the Strait remains closed, the bulk of the upward pressure in yields will likely concentrate at the long end. The 2s-10s and 2s-30s spreads could widen meaningfully from here, reshaping the cost of capital across the global economy.
China's Two-Sided Stake
China's position in this story is more conflicted than it may first appear. The recent Trump-Xi summit failed to produce any meaningful deliverables on the Iran front, with no clear commitment from Beijing to use its influence over Tehran. Yet China has powerful reasons to want this conflict resolved.
The first reason is structural: China's economy is heavily dependent on external demand to absorb its massive net surplus in goods exports. With domestic demand weak, exports have effectively become the lone leg holding up growth. A prolonged conflict that depresses external demand would knock out the only remaining pillar of stability.
The second reason is direct: China is the world's largest crude importer, taking in roughly 11 million barrels per day of seaborne crude before the Iran disruption. Beijing needs cheap and reliable access to oil, and the current price environment threatens both. Taken together, these two pressures suggest that China would very much like to see this conflict end — and may be willing to play a constructive role in pushing it toward resolution. If the United States is prepared to offer Iran meaningful concessions, there is a plausible scenario in which Beijing leans on Tehran around the nuclear file. China's interest in a healthy global economic environment is too central to its own survival strategy to remain on the sidelines indefinitely.
The Road Ahead
The interlocking pieces of this crisis — energy supply, inflation dynamics, bond yields, and great-power negotiations — are unlikely to resolve cleanly or quickly. The toll structure of any settlement, and the question of who ultimately bends and on which file, will shape markets for months. Even a best-case diplomatic outcome cannot quickly restore the supply that has already been lost. Inflation expectations, once dislodged, are stubborn to reanchor. And China's eventual role in pressuring Iran may prove as consequential as any direct American leverage. The weekend ahead may bring the first hints of how this complex bargain begins to take shape.