From Blockade to Bargain? Oil, Hormuz and the Geopolitical Risk Premium After the Midterms

For most of 2026 the oil market priced a war. Since the U.S. midterm elections it has started to price a deal. Brent fell by roughly 12% in the days after the vote and closed at about $92.50 a barrel on 9 November, after trading above $110 at the start of the month. The question for investors is whether this is the beginning of a durable normalisation or a premature unwinding of risk.

How We Got Here

Since the war began in February, Iran has asserted control over the Strait of Hormuz, through which roughly a fifth of global seaborne oil passes, requiring vessels to obtain permission and pay transit fees. A 60-day ceasefire expired in mid-August without a lasting agreement. In September, attacks on shipping and a drone strike on Saudi Arabia's East-West pipeline pushed Brent to almost $108 a barrel. Washington responded with releases from the Strategic Petroleum Reserve, whose inventories had already fallen below 300 million barrels in August, the lowest level since 1983.

The election calendar shaped the conflict throughout the autumn. The U.S. administration repeatedly signalled that it expected an agreement, or a resumption of strikes, after the vote. In late October, concern that military action could resume pushed Brent to four-year highs. Oil rose more than 13% over the month of October.

What Changed After the Vote

Three developments drove the reversal. First, Qatar-mediated talks in Doha gave markets a credible diplomatic channel, and signals from Washington suggested little appetite for further escalation. Second, physical supply has improved: crude exports from the Persian Gulf have been recovering towards pre-war levels, albeit at higher transport and insurance costs, and OPEC output has expanded by about 1.38 million barrels a day, according to recent estimates. Third, the Democratic majorities in both chambers of Congress changed the political calculus around a prolonged conflict. On 4 November alone, Brent fell by more than 8% to around $95, leaving it down about 16% for the week at that point.

What Remains Unresolved

Prices have fallen faster than the underlying risks. No agreement has been signed, and U.S. Secretary of State Marco Rubio has played down the prospect of an imminent breakthrough. Tanker attacks continued into November. Even under a deal, Iran may find it useful to keep some leverage over transit, whether to secure guarantees or compensation. And the product market remains much tighter than crude: European diesel prices had more than doubled in 2026 by late summer, reflecting both the Gulf disruption and the effects of the war between Russia and Ukraine on refining and exports.

The range of professional forecasts illustrates how wide the distribution remains. At the start of November, Goldman Sachs raised its oil forecasts and warned that Brent could reach $140 in 2027 if supply risks materialise, at the same time as the spot market was falling on hopes of peace.

Macroeconomic Transmission

For central banks, the decline in oil is the most welcome development of the quarter. Energy prices were up about 20% year on year in the U.S. in September and 18.9% in the euro area, and they explain most of the gap between headline and core inflation. A sustained move into the $80s would lower headline inflation mechanically in the first half of 2027 and reduce the pressure on the Federal Reserve and the ECB to tighten further. The risk runs the other way if talks fail: a renewed spike would arrive in an economy where services inflation is already running at around 3%.

Currency markets reflect the same asymmetry. Energy importers in Europe and Asia carry the terms-of-trade cost of high oil, while exporters benefit. Gold, which set an intraday record of about $5,595 an ounce in January, fell to around $3,900 at the start of November as the dollar and yields rose and investors sold liquid assets to cover equity losses, before recovering above $4,100 as the dollar and Treasury yields eased.

Scenarios

Verified reopening. A phased transit agreement with third-party monitoring. Brent settles in the $75–85 range, product cracks narrow, and the inflation outlook improves materially in 2027. Energy equities and defence give back part of their gains; transport and energy-intensive industries recover.

Managed stalemate. Talks continue without a final agreement while flows keep improving. Brent oscillates around $85–100 with headline-driven spikes. Volatility, not direction, is the dominant feature.

Breakdown. Talks fail and strikes resume. Brent returns to or above its autumn highs, inflation expectations rise, and central banks face the stagflationary dilemma of 2022 with less room to respond.

What This Means for Investors

Geopolitical outcomes are close to impossible to forecast with confidence, and the past three months have punished investors who tried. Brent fell by more than 8% in a single session twice in the first week of November alone. In that environment, the more tractable question is how much risk to hold, not which outcome to bet on. Systematic processes that scale exposure to measured volatility and cut risk when tail estimates rise are built for markets where the distribution of outcomes is bimodal and headlines change it daily.

The structural lesson outlasts this conflict. Chokepoints, sanctions and supply chains have become instruments of policy. Portfolios built on the assumption of frictionless global trade need to account for energy shocks as a recurring risk factor rather than a once-a-decade event.