TL;DR

US Central Command confirmed late Thursday that US forces carried out strikes on Iranian military sites near the Strait of Hormuz after Iranian forces launched missiles, drones, and small boats at three US Navy guided-missile destroyers. Iran claims its forces struck back, inflicting significant damage on US vessels. Brent crude surged 2.5% to $103.84 per barrel on the news, erasing most of a 5%-plus decline from earlier in the session that had been driven by hopes of a peace deal.

What Happened: US-Iran Strikes Near Hormuz Derail Deal Hopes

At approximately 22:00 UTC on May 7, 2026, US Central Command (Centcom) confirmed that US Navy forces conducted what it called "self-defense strikes" in the Strait of Hormuz. According to Centcom's official statement, Iranian forces launched "multiple missiles, drones and small boats" as three US guided-missile destroyers transited the waterway. US forces intercepted the incoming threats and then struck Iranian military facilities, including missile and drone launch sites, command and control locations, and intelligence, surveillance, and reconnaissance nodes. Centcom said no US assets were struck.

Iran's account differs sharply. The Iranian military's Khatam al-Anbiya Central Headquarters said the US targeted an Iranian oil tanker traveling from Iranian coastal waters near Jask toward the strait, as well as another vessel near the Emirati port of Fujairah. Iran said the US also carried out air attacks on civilian areas along the coasts of Bandar Khamir, Sirik, and Qeshm Island. Iran's armed forces subsequently attacked US military vessels, with Iranian state media claiming significant damage was inflicted. Air defenses were activated in western Tehran, and multiple explosions were reported in Bandar Abbas and Minab.

The exchange followed a volatile day of diplomacy. Earlier Thursday, oil had fallen roughly 5% as markets responded to reports that Washington and Tehran were close to agreeing on a memorandum of understanding to end their two-month conflict and reopen the Strait of Hormuz. The proposed deal, reported by Axios, included a moratorium on Iranian nuclear enrichment, a US naval blockade lift, and the release of frozen Iranian funds. By midday, however, a member of Iran's Expediency Council stated that the US must first pay reparations for damage done to Iran, and Iran's foreign ministry said negotiations require a "genuine attempt" rather than "dictation, deception, extortion or coercion." Oil recovered much of its losses before the evening's strikes pushed it higher still.

Why Oil Markets Moved

The Strait of Hormuz, a narrow waterway between Iran and the United Arab Emirates, handles roughly 20% of the world's seaborne oil trade. Since US and Israeli forces launched Operation Epic Fury against Iran in late February 2026, the strait has been effectively closed to most tanker traffic. That closure has removed approximately 15 million barrels per day of crude and petroleum product exports from global markets, according to the analytics firm Kpler, driving Brent crude up approximately 65% year-over-year to its current level above $103 per barrel.

Thursday's session illustrated how sensitive oil prices have become to any shift in the diplomatic outlook. The 5% decline on deal hopes and the subsequent rebound to fresh highs on renewed conflict signal that the market is pricing a very wide range of outcomes, from a full reopening of the strait to a prolonged escalation. With Brent having briefly exceeded $115 per barrel in recent weeks and gasoline prices in the US above $4.50 per gallon, every headline carries outsized weight.

Citi US equity strategist Scott Chronert noted that "the duration of the conflict and the implication that has for higher oil prices for longer is a big deal as it pertains to future growth expectations for many parts of the market, as well as how it influences the Fed thinking in terms of the interest rate dynamic."

Implications for Traders

Energy and crude oil traders: Tonight's escalation resets the risk premium that markets had partially unwound during Thursday's morning session. The immediate question is whether US Centcom will describe this as an isolated incident or a new phase of the conflict. Any further Iranian retaliatory strikes, or US escalation beyond the strait, would likely send Brent toward and potentially beyond the $115 range seen earlier this month. Conversely, a credible US statement limiting the scope of tonight's action could stabilize prices quickly.

Equities and index futures traders: Energy sector stocks (exploration, production, refining) have been primary beneficiaries of elevated oil prices throughout the conflict. Defense contractors and shipbuilders have also outperformed. The risk to broader indices comes from two directions: sustained oil above $110 begins to compress consumer spending and corporate margins, while the Fed faces a harder position if energy-driven inflation keeps headline CPI elevated even as broader demand softens. S&P 500 futures and European index futures will be the first instruments to reflect market positioning when regular hours open on Friday.

Natural gas and LNG traders: The Strait of Hormuz disruption has been equally significant for liquefied natural gas (LNG), which represents roughly 20% of global LNG trade. Any sustained military activity near the strait extends the supply premium in European and Asian gas markets. US LNG exporters have been capturing record cargo volumes as buyers divert from Middle Eastern suppliers.

Crypto and risk-asset traders: Escalating geopolitical risk historically correlates with short-term safe-haven flows toward the US dollar and gold, and away from higher-risk assets including crypto. Bitcoin and the broader crypto market should be monitored overnight for any significant risk-off repricing if the military situation continues to develop.

Potential Positives vs Negatives

Potential positives:

  • US energy producers and exporters continue to benefit from elevated prices, with US crude exports at record highs as buyers substitute away from Middle Eastern supply.
  • A definitive US military response that constrains Iranian naval activity could, paradoxically, create conditions for faster deal-making if Iran calculates the military cost is too high.
  • Gold and other safe-haven assets tend to appreciate in periods of elevated geopolitical uncertainty, offering diversification for energy-heavy portfolios.

Potential negatives:

  • A full breakdown in negotiations would remove the peace-deal premium from markets and potentially push Brent back toward $115 or higher, intensifying inflationary pressure globally.
  • Iranian strikes on US destroyers, if confirmed and significant, raise the risk of a US escalation beyond the strait, potentially targeting nuclear or energy infrastructure deeper inside Iran.
  • Insurance markets for tankers and shipping through the region have already hardened dramatically. Further conflict could make commercial transit through the strait economically unviable even if it is technically reopened.
  • Consumer-facing industries, including airlines, ground transportation, and chemicals, face continued input cost pressure.

What Could Happen From Here

Base scenario (40% probability): The overnight exchange is characterized by both sides as a limited, defensive incident. Talks resume through Pakistani intermediaries over the next 24-48 hours. Brent stabilizes in the $100-105 range, with the market pricing a roughly equal probability of a deal and further escalation. Confirmation would be a US Centcom statement describing a return to a de facto truce and renewed diplomatic contact through intermediaries. Invalidation would be any further Iranian missile or drone launch against US forces or Gulf state infrastructure.

Upside scenario for oil (30% probability): Iran formally rejects the US memorandum in the next 24 hours and responds with additional attacks on Gulf state oil infrastructure or US military assets. Trump activates a new wave of airstrikes against Iranian targets under Operation Epic Fury, as threatened. Brent tests the $115-120 range. Confirmation would be an explicit Iranian statement rejecting the deal plus a new wave of drone or missile attacks. Invalidation would be Iran delivering a written response to the US via Pakistan that keeps talks technically alive.

Downside scenario for oil (30% probability): Despite tonight's exchange, both sides step back from full escalation and resume back-channel talks within hours. A revised or simplified framework deal is announced over the coming 24 hours, with Hormuz transit restrictions eased progressively. Brent falls sharply toward $90-95 on the prospect of supply returning to the market. Confirmation would be a joint statement from US and Pakistani or Omani mediators announcing a new ceasefire or outline agreement. Invalidation would be any new Iranian attack on US assets.

What to Watch Next

  • US Centcom statements on the scope of tonight's strikes and whether further action is planned.
  • Iranian Supreme Leader and Foreign Ministry responses to the US proposal, expected to be delivered through Pakistani mediaries.
  • Brent crude price action during Asian trading hours (midnight to 04:00 UTC), which will set the tone for European and US sessions on Friday.
  • S&P 500 futures and VIX for signs of broader risk-off positioning in equity markets.
  • Trump social media posts on Truth Social, which have repeatedly moved oil prices by 3-5% in single sessions throughout the conflict.
  • Tanker and shipping insurance rates from Lloyd's and other underwriters, which serve as a real-time proxy for market confidence that the strait can reopen safely.

Sources

For related ChartDojo analysis on how the Hormuz closure is reshaping energy markets: US LNG Exporters Eye Record H2 as Hormuz Closure Blocks 100 Cargoes a Month and Valero Port Arthur Refinery Shutdown: Oil and Futures Risk Watch.

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FAQ

Why did oil prices fall earlier Thursday before spiking tonight?
Earlier in the day, reports circulated that the US and Iran were close to a one-page memorandum of understanding to end the war and reopen the Strait of Hormuz. Those reports triggered a roughly 5% decline in Brent crude as traders priced in a potential return of Hormuz tanker flows. When Iranian officials rebuffed the US proposal and tonight's military exchange occurred, the peace premium was unwound.

What is the Strait of Hormuz and why does it matter for oil prices?
The Strait of Hormuz is a narrow waterway between Iran and Oman/UAE that connects the Persian Gulf to the Gulf of Oman and the broader ocean. Roughly 20% of the world's seaborne oil trade and a significant share of global LNG shipments pass through it. Its closure since the start of the US-Iran conflict in February 2026 is the primary driver behind the roughly 65% year-over-year increase in Brent crude prices.

Header image source: pexels by Mikhail Nilov. License: PEXELS.