Iran Rejects Hormuz Deal: Oil Swings, Fed Rates Uncertain

TL;DR

A senior Iranian official on Thursday rejected the US Hormuz peace proposal, demanding reparations and calling Washington's terms unrealistic. Oil had fallen as much as 5% earlier in the session on deal optimism, then reversed sharply after the rebuttal, with Brent crude closing at $100.06 per barrel. Cheniere Energy fell 5.5% after reporting a $3.5 billion net loss tied to natural gas derivatives. The Fed's Kashkari said the Iran war has made the path for interest rates uncertain, and ECB board member Schnabel said the ECB may need to hike if the energy shock spreads. Stocks pulled back from Wednesday's record highs as deal confidence faded into the close.

What Happened

On Wednesday, May 6, the Axio reported that the US believed it was close to a one-page agreement with Iran to end the war and reopen the Strait of Hormuz -- the narrow channel through which roughly 20% of the world's seaborne oil flows. Brent crude plunged as much as 11% and US equities surged to all-time highs on that report.

But by Thursday, the optimism had largely evaporated. Mohsen Rezaei, a senior member of Iran's Expediency Council, said publicly that the US must pay reparations for damage done to Iran before any deal can be struck. He called Washington's Hormuz framework "unrealistic" and said Tehran would not accept what he described as a dictated outcome. Iran's Foreign Ministry spokesperson Esmaeil Baqaei confirmed separately that Iran is still reviewing the US proposal and will present its response through Pakistani mediators -- with no timeline given.

President Trump, responding to the impasse, said the US military operation known as Operation Epic Fury "will be at an end" if Iran meets agreed terms, but warned that Iran will be "bombed at a much higher level" if it refuses a deal.

By the close of US trading on May 7, oil had largely given back its early-session losses. Brent crude settled at $100.06 per barrel, down roughly 1%, after falling as much as 5% earlier in the day. WTI (West Texas Intermediate), the US benchmark, settled at $94.81, down 0.28%. US equities pulled back from Wednesday's records but did not reverse sharply.

Iran Rejects Hormuz Deal Terms: Why Markets Moved

The Strait of Hormuz closure is the defining energy supply shock of 2026. Since the strait was effectively shut, global oil and fuel inventories have drawn down significantly as refineries worldwide scramble to offset production shortfalls. Every credible signal toward resolution sends energy prices lower and risk assets higher. Every sign of breakdown does the opposite.

Thursday's reversal followed a clear pattern: early optimism from deal expectations -- fueled by Wednesday's reporting -- gave way to Iran's explicit conditional rejection. Markets repriced the probability of near-term resolution downward. Brent, which had briefly touched a two-week low near $95 during the session, climbed back toward $100 as Iran's statements crossed newswires.

Cheniere Energy (ticker: LNG), the largest US liquefied natural gas exporter, compounded the sector sell-off. The company reported a $3.5 billion net loss for the first quarter of 2026, driven by $4.8 billion in non-cash mark-to-market losses on LNG-linked derivative contracts. Natural gas markets have been deeply volatile since the Hormuz disruption cut off roughly 100 LNG cargo shipments per month from the Middle East. Cheniere's CFO stressed that the losses are non-cash and are expected to unwind over time; the company's adjusted net income for the quarter was approximately $1 billion, and management raised its full-year 2026 earnings outlook. Still, the headline loss and the 5.5% share drop reinforced the read-through that the war's financial toll on energy companies is material. Chevron and ExxonMobil also reported hedging-related impacts in Q1.

On the monetary policy front, Minneapolis Fed President Neel Kashkari said Thursday that the conflict in the Middle East has added meaningful uncertainty to the interest rate outlook. The Fed held rates steady at its most recent meeting and cited the need to assess the pass-through of energy costs into broader inflation. Kashkari's remarks, which came in a late-afternoon session, signal that the Fed is watching the Hormuz situation closely as it calibrates the pace of any future adjustments. ECB Executive Board member Isabel Schnabel added a similar note for Europe: she said the ECB will need to raise interest rates if the Iran war leaves a more lasting mark on inflation -- a notable shift given the ECB's recent dovish guidance.

Implications for Traders

Oil and energy futures traders are operating in a headline-driven market where deal signals and deal rejections generate outsized intraday swings. Brent moving 5%+ in either direction within a single session based on one official's statement is now normal. Positioning size and stop management become critical when any single news item can reverse a full session's move.

Equity futures traders saw US indices give back Wednesday's record-high gains, but the pullback was measured rather than sharp. The current market structure treats a Hormuz deal as a positive catalyst that has not yet fully priced in, while a deal breakdown is viewed as a risk that most have already partially hedged. This limits the size of equity declines unless escalation becomes kinetic.

Natural gas and LNG traders face continued supply dislocation. Cheniere's chief commercial officer said the company is "astounded" that global gas prices have not risen further given the closure's scale. He noted that prices could climb materially in 2026 as Europe fills its storage for winter and Asian buyers feel the full impact of lost Middle Eastern LNG cargoes. European natural gas benchmarks and US Henry Hub futures remain a key variable for this trade.

Interest rate and bond traders should track Fed and ECB commentary carefully over the next several weeks. If energy prices stay elevated or rise, central banks face a supply-shock inflation problem that limits their ability to cut rates -- or in the ECB's case, could force rate increases. That dynamic reshapes duration positioning across fixed income.

Potential Positives vs Negatives

Positives from here:

Iran's FM spokesperson did not reject the US proposal outright -- he said Iran is still reviewing it and will respond through mediators. Diplomatic channels are technically still open.
Saudi Arabia's Public Investment Fund (PIF) successfully placed $7 billion in dollar bonds Thursday with strong investor demand -- a sign that Gulf capital markets remain functional despite the conflict, and that investors expect some form of resolution.
Cheniere raised its 2026 outlook, signaling that higher LNG prices and stronger demand are benefiting its operating business even as derivatives created a paper loss. Energy producers with physical supply have a tailwind if prices stay elevated.
A partial deal or temporary corridor agreement -- even short of a full Hormuz reopening -- could trigger another sharp relief rally in oil and equities similar to Wednesday's move.

Negatives from here:

Iran's reparations demand significantly raises the bar for any quick agreement. Washington is unlikely to accept liability payments, which means the two sides may not be close to a workable framework.
Trump's continued threat to bomb Iran at a "much higher level" leaves open a military escalation path, which would likely push oil sharply higher and trigger a broad risk-off move.
Kashkari's remarks confirm that the Fed will not rescue markets from energy-driven inflation. If Brent stays above $95-$100, the probability of a rate cut in 2026 continues to diminish.
Schnabel's ECB comments add a rate-hike risk for European assets if energy inflation proves sticky, which would weigh on euro-zone equities and widen credit spreads.

What Could Happen From Here

Base scenario (40% probability): Iran delivers a qualified response through Pakistani mediators within 48-72 hours, rejecting the full US proposal but offering a counter-framework. Talks continue at a working level. Oil holds near $95-$105 with continued elevated volatility. Equities remain choppy within range of records. The Fed holds rates through the summer. Probability confirms: Iran response delivered before the weekend without military escalation.

Upside scenario (30% probability): Iran and the US reach a preliminary agreement on Hormuz passage -- potentially a phased corridor opening rather than a full deal -- within the next week. Brent falls sharply toward $80-$85. US equities extend above records with the S&P 500 targeting fresh highs. The Fed signals flexibility on rate cuts by year-end. Invalidated if Iran's formal response is a flat rejection or if military strikes resume.

Downside scenario (30% probability): Iran's formal response rejects the US proposal, and Trump follows through with a military escalation threat. Brent surges back above $110-$115. US equity futures sell off sharply overnight. Safe-haven flows push gold and Treasury bonds higher. The Fed is left managing a stagflationary impulse. Invalidated if diplomatic backchannels produce a de-escalation signal within 24 hours.

What to Watch Next (Next 24 Hours)

Iran's formal response through Pakistani mediators -- the single most important catalyst. Any signal of a counter-proposal is bullish for risk assets. A flat rejection is bearish.
Brent crude price action at the open -- watch whether Brent holds below $100 or tests $102-$105. A break higher signals deal pessimism is the dominant read.
US military activity reports -- any new strikes or escalation announcements from either side would sharply reprice oil.
Kashkari and other Fed speakers -- listen for any updated guidance on rate flexibility tied to energy inflation.
ECB follow-through on Schnabel's comments -- whether other ECB members echo the rate-hike risk, which would affect euro-zone equities and European credit.
Cheniere and LNG sector post-market reactions -- watch whether the derivatives-loss narrative spreads to other energy companies reporting this week.

Sources

FAQ

Why did oil go up after being down earlier on Thursday?
Oil fell sharply early in the session as traders priced in the possibility of a deal following Wednesday's reports. But after Iran's Mohsen Rezaei publicly rejected the US proposal and demanded reparations, investors reduced their deal probability estimates, which pushed oil prices back toward $100 per barrel.

Is Cheniere Energy's $3.5 billion loss a sign of broader LNG sector stress?
The loss was primarily non-cash -- it reflects a mark-to-market decline in the value of derivative contracts linked to LNG prices, not an operating loss. Cheniere's actual adjusted earnings for the quarter were approximately $1 billion, and the company raised its full-year outlook. Chevron and ExxonMobil also reported hedging-related impacts. Physical LNG demand and prices remain strong; the paper losses are expected to reverse as contracts settle.

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Iran Rebuffs US Hormuz Proposal: Oil Swings and Fed Rate Uncertainty Deepens