The main characteristics of the markets in May were the gradual but steady erosion in the value of a barrel of oil and the insatiable appetite for equities, particularly the juggernauts of the technology sector. A significant fall in volatility suggests a tentative absence of anxiety, although, by historical standards, trading conditions remained vicious. In our market, trading volume, while decent, was lower than in March or April, which is another sign of receding panic.

This laissez-faire attitude casually, and perhaps even brazenly, ignored developments on the ground. The Iranian war further increased consumer prices, particularly in the US, but elsewhere as well. Central banks are unlikely to cut interest rates and may even raise borrowing costs. The first signs of demand destruction have emerged, but the consensus is that supply losses will be so severe in the foreseeable future that global oil inventories will continue to decline.

Right on cue, commercial stockpiles in the United States fell by 31 million barrels over the month, according to the weekly EIA Status Report. The average estimate from the EIA, OPEC and the IEA for global stock depletion in the third quarter is 3.27 mbpd, while Energy Intelligence believes that 16 mbpd of crude oil and products have been trapped behind the Strait of Hormuz over the past three months, projecting an annual supply deficit of 2.6 mbpd.

Notwithstanding these alarming figures, WTI settled $16 lower on the month, while losses in Brent were even steeper. In equities, the MSCI All-Country Index rallied 5%, and the tech-heavy Nasdaq Composite Index returned more than 8%. The AI craze has certainly turned stock markets into a one-way street, while factors such as the SPR, oil on water, and some degree of demand destruction helped mitigate the harmful effects of the Persian Gulf conflict.

The key ingredients behind these performances, however, were the myth, the fiction, or the belief that the war would soon end amicably, and that whatever transpired between March and May would be confined to the margins of history books.

Sentiment is a powerful driver, and those betting on a mutually acceptable outcome could well prove correct. We are in that camp, although we believe the Promised Land will be reached later than currently hoped. We should not be under the illusion that the current negotiations are peace talks. They are not. They are laying the groundwork for an extension of the ceasefire, during which the crucial issues will be discussed. These negotiations are paving the way for further negotiations.

While successful talks, the permanent reopening of the Strait, and the elimination of Iran's hostile nuclear capabilities would serve the interests of every human being on this dystopian planet, these issues, given their significance, are unlikely to be resolved imminently. It may turn out that the repeated extension of the ceasefire becomes the new status quo, which, as the reciprocal strikes over the weekend illustrate, does not prevent either side from rattling its sabre.

And this is the point at which one must recall the forecasts of several well-equipped researchers and analysts, including the IEA and major investment banks. Global oil stockpiles are expected to fall to critical minimum operational levels this month. It is entirely plausible that further stock depletion will cause today's optimists to reassess their views. And we know that investors' moods can turn faster than a VLCC attempting to transit the Strait of Hormuz.

By the Way, There Is Another War

It is not far-fetched to suggest that, in addition to the slow progress surrounding Iran, the war Russia has been waging against Ukraine for more than four years has also contributed to the downturn in oil prices. Put differently, expectations that this bloodshed will eventually end are growing.

Why? Well, if you had placed a snail on the Russian-Ukrainian border at the end of February 2022, it would have made greater advances than the Russian army has made into Ukraine. This is not to say that Russia is losing the war, but it is certainly not winning it.

The winds of change are clearly blowing, and Ukrainian resilience, particularly in the military sphere, has been admirable. The country has become, and apologies for not recalling the source, the Silicon Valley of modern drone warfare. The economic damage inflicted by these attacks is approaching unbearable levels.

Russia's economic ministry recently cut its 2026 growth forecast from 1.3% to 0.4%, citing labour shortages, excessive government spending, and damaging international sanctions—self-inflicted wounds brought about by the decision to go to war. The Russian central bank has been forced to maintain elevated interest rates, which support the rouble, much to the chagrin of Russian exporters of key commodities, including oil.

The Russian oil sector is particularly vulnerable to Ukrainian attacks. Energy Intelligence estimates that Russian refinery runs have fallen to their lowest level in 17 years. At the beginning of May, around 30%, or 1.9 mbpd, of refining capacity was offline. Crude oil export estimates have been revised down by 2.7% year-on-year. Although Russian budget revenues rose by 40% in April compared with the previous month due to exceptionally high Urals prices, they remained 21% lower than in the corresponding month of 2025.

It is reasonable to argue that the struggling Russian oil sector should be supportive of prices. But so should the closure of the Strait of Hormuz, yet Brent still fell by $22 in May. Tacit dissent, both on social media and within the Russian administration, appears to be growing. Vladimir Putin allegedly spends much of his time in underground bunkers. In the United States, the number of Republicans publicly speaking out against the Iranian war and the proposed peace deal is also rising.

It is difficult not to draw parallels between the two conflicts. The longer they persist, the stronger their domestic and international opposition becomes. Neither has unfolded according to plan. While both have led to considerable supply disruptions, current price action suggests that they may end sooner rather than later.

Let us hope this view prevails. History teaches us, however, that when authoritarians are cornered, their actions can become irrational and unpredictable.

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