Traders place heavy wager on end of Iran war

Had perpetual conflict in the Middle East been on the ballot, the result would have been predictable.

The GOP is publicly blaming the war for the midterm rout, and investors are taking that explanation at face value. The signal is that Trump will be forced out of Iran, perhaps soon. If that occurs, the Strait of Hormuz will reopen and oil will flow again.

Markets are aggressively pricing in that scenario, with WTI down $7.69 to $88.39 on the day, one of the sharpest plunges of the conflict. The settlement was the lowest since August 31. Given that oil touched $105 late last week, the swing is enormous. It is also a meaningful dampener for inflation, visible in the Treasury market where yields fell 3-6 basis points, although there are competing forces there since Democrats now look set to keep the Senate for the next 4-6 years.

My fear is that reaching a deal to end the war may not be easy. Trump has spent months trying to pull the US out of the conflict without much success, and it is hard to know how willing Iran will be to negotiate after the election. Should an agreement be reached, the pace at which oil could move and inventories could be rebuilt remains uncertain. Refineries are already at full capacity and stockpiles have been drained substantially.

Today's declines are consistent along the oil and gasoline futures curves, pointing to genuine optimism, yet that optimism has been proved wrong many times before in this war. Reports circulating today point to positive developments, and what appears to be a deal has been put forward. The easiest course for Trump at this point may be to take what is offered. His own party is likely to back any agreement that lets them escape this blame game.

There is talk right now of a pre-emptive Iranian strike, but it is hard to believe Iran would waste this opportunity to negotiate.