Ceasefire Hopes Hit Oil, But Iran’s Real Leverage Is Bab al-Mandeb

This Conflict Isn’t Resolved, It’s Repriced

We are seeing two things happen at once between the US and Iran, military escalation and diplomatic back-channeling are running in parallel.

Neither side wants to be seen publicly as the one pushing hardest for negotiation. Iran cannot look weak after the strikes, and the US, especially under Trump, cannot look like it is offering Iran an easy way out after committing military force. That is why the public messaging looks hardline while the real diplomacy is more likely happening quietly through Arab mediators, back channels, and carefully managed statements that do not fully reflect what is happening in private.

It is also important to be realistic about what airstrikes can achieve. Iran has spent decades dispersing and hardening its military infrastructure because it expected this kind of campaign. Underground facilities, decentralised production, and built-in redundancy mean destruction assessed from the air is often more optimistic than the reality on the ground.

The drone issue is especially important. Iran’s drone program is low-tech enough that it can be rebuilt relatively quickly. Destroying a factory does not remove the engineering knowledge, the supply chains, or the smaller dispersed workshops that can keep production going.

The warship side matters most for the Strait of Hormuz. If Iran’s naval production and support capacity has genuinely been degraded, that weakens its ability to keep the Strait closed for a prolonged period. That may be one reason it is now appearing more open to diplomacy.

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The Bab al-Mandeb Threat

Iran signalling that it could extend disruption to the Bab al-Mandeb, the strait between Yemen and Djibouti that connects the Red Sea to the Gulf of Aden through the Houthis, would represent a serious escalation.

If both Hormuz and Bab al-Mandeb were disrupted at the same time, the shock would become far more severe. You would effectively have two of the world’s most important maritime chokepoints under pressure at once.

This is Iran signalling that if pressure continues, the disruption can spread well beyond Hormuz. It is a way of telling the US that the cost of escalation could become much larger, making a negotiated outcome look more attractive than continued military pressure.

A simultaneous disruption across both straits would affect more than 30% of global seaborne trade and would hit European energy supply especially hard given how important the Suez route remains to regional flows.

What happened in Oil Markets and what this means for investors

The 2% drop in crude on ceasefire hopes makes sense, but it still looks premature. Markets are pricing in the probability of a resolution, not an actual resolution.

The first thing to watch is the tone of any back-channel diplomacy. If signs start to emerge that private talks are progressing, oil could soften further as some of the geopolitical premium comes out of the market.

The second risk is Bab al-Mandeb. If that threat starts to materialise, we would expect a sharp reversal in oil almost immediately, and Brent could move well above current levels.

The third issue is the military build-up on the ground. If that escalates, oil is likely to move higher again regardless of whether diplomatic channels remain open.

So for us, the move lower in crude reflects relief, but not certainty. The situation is still fragile, and the oil market remains highly sensitive to any change in either diplomacy or military escalation.