Geopolitical premium in the Middle East lifts the oil price baseline, as commodities get trapped in a “high-volatility” game

The U.S.-Iran situation once again escalates, and global commodities are seeing a new round of a chaotic “long-vs-short tug-of-war.”

On April 1, local time, U.S. President Trump claimed that within the next two to three weeks, the United States would “launch a fierce strike” against Iran. As a result, London Brent crude futures on April 2 saw intraday gains of more than 7% at one point, edging close to $110 per barrel. International gold prices, meanwhile, saw a straight plunge on the morning of the 2nd, falling below the $4,700 and $4,600 thresholds in sequence, with a low near $4,553 per ounce.

As a response, on April 2, Iran’s top leader’s foreign affairs adviser, Velayati, posted on social media saying, “The Strait of Hormuz is open to the world, but it will forever close to enemies of the Iranian people and their bases in the Middle East.”

Institutional sources told First Financial that geopolitical risk is reshaping the market pricing logic—“fast in, fast out” is becoming the dominant trading behavior, and the ability to manage volatility has become key to investors’ survival. This commodities game driven by geopolitics, with high volatility, may become the norm.

“Even if there is a ceasefire tomorrow, oil prices can’t go back.” This is a broad consensus among market institutions on the crude oil pricing logic, as the geopolitical risk premium lifts the crude oil price center of gravity.

Gold faces a liquidity test

According to a Xinhua News Agency report, on the evening of April 1 (morning of April 2 Beijing time), Trump delivered a speech in which he claimed—on his own—that the U.S. had achieved “rapid, decisive, overwhelming victory” in the Iran conflict.

After that, global assets saw violent fluctuations, with gold hit first. As of the time of publication, spot gold was at $4,621 per ounce. COMEX gold futures fell 3.5%, to $4,644 per ounce. Previously, international gold prices had risen for four consecutive days.

“Atypical moves in the gold market this morning (April 2) are not a simple technical pullback,” the aforementioned institutional source said. Gold had just reclaimed the $4,800 level, and within minutes after Trump’s speech, it staged a “plunge from a high platform.” To a large extent, this reflects the fragility and speculative nature of funds currently in the market. Both long and short funds show a “fast in, fast out” trend, significantly amplifying gold volatility.

Dong Wu Securities analysts believe that current market pricing of geopolitical risk is showing a clear “pulse-like” pattern: news triggers sharp rallies, while expectation fulfillment or a turning point triggers stampede-style exits. The Shenwan International Futures Research Institute said that while the suppressing factors for short-term precious metals have eased somewhat, the market has not reached a one-sided upside consensus; an intense game between profit-taking positions and hedging/safe-haven positions has caused the day’s trading range to expand sharply.

Haitong Securities, meanwhile, said that the recent decline in gold prices is mainly due to liquidity squeeze. When facing risk, investors tend to hold cash, and assets such as gold are all subject to selloffs. It said that similar macro scenarios can be referenced from the 1973–1975 oil crisis: during that period, gold prices experienced “two drops and two rises,” and the liquidity squeeze formed by avoiding risk and the economic downturn was the main cause of the gold price decline.

On the outlook for gold prices going forward, institutional views are clearly split. Guotong Jin Yuan Futures believes that judging from the recent pattern of gold trading stronger than silver, the logic of “stagflation trade” is gradually approaching; however, it is still too early to say that the adjustment of precious metals is over, and the gold-to-silver ratio may have further room to repair upward.

Goldman Sachs maintains its long-term bullish stance and expects gold prices to rise to as high as $5,400 per ounce by the end of 2026. But Goldman also warned that if the Strait of Hormuz continues to be disrupted, gold may still face additional selling pressure in the short term.

Institutions have simulated how the conflict’s subsequent trajectory might play out: even if the geopolitical event ends, it is not necessarily a one-sided negative for gold. IG market analyst Tony Sycamore said that if the conflict ends, it could be a double-edged sword for gold. On the one hand, if a durable peace agreement is reached, the geopolitical safe-haven buying that supported gold during the war may weaken; on the other hand, if oil prices fall and inflation pressure eases, market expectations for the Federal Reserve’s rate cuts in 2026 could heat up again, which may provide support for gold.

Oil prices “can’t go back to $65”

Compared with gold’s violent churn, the crude oil market’s performance looks “clear in direction and strong in momentum.” On April 2, Brent crude broke through $109 per barrel in one fell swoop, surging 7.8% on the day.

Geopolitical risk premium lifts the crude oil price center of gravity. In this leg of sharp oil gains, WTI crude futures climbed steadily from around $65 per barrel; in March they even rose to $113. The month’s cumulative gain exceeded 51%, and the gain for the year-to-date reached 90.7%.

Robert Reney, head of commodities research at the West Pacific Bank, analyzed: “Trump’s remarks have not changed the market’s basic reality. The strait has effectively been closed for a month, and crude oil flows remain severely constrained. A disruption for at least several weeks—or longer—may still occur in the future.” He added that he expects Brent crude to trade in the $95 to $110 per barrel range in the near term.

On April 1, local time, Trump said the U.S. did not need the Strait of Hormuz in the past, and it does not need it now either. For countries that need to obtain oil through the Strait of Hormuz, Trump encouraged those countries to either “buy oil from the United States,” or directly “go and steal oil” through the Strait of Hormuz.

“Even if there is a ceasefire tomorrow, oil prices can’t go back.” Andy Lebo, president of American Lippbo Petroleum Consulting, said that even if the conflict ends tomorrow, oil prices could immediately drop by $10 to $15, but they would never return to the pre-conflict level of around $65, “because the market has already started pricing in a higher geopolitical risk premium for the entire Middle East.”

Guotong Jin Yuan Futures further analyzed: currently, geopolitical signals are still switching back and forth repeatedly, and market expectations are highly divergent. Even if the Middle East conflict ends this time, concerns about sustained long-term disruption to the global economy from high oil prices are becoming even more evident, making it difficult for oil prices to return to earlier levels.

Damage to the supply chain is also unlikely to heal quickly. Shenwan International Futures judged that, from the supply chain perspective, even if the Strait of Hormuz is reopened immediately, the recovery of the entire supply system will still take time, including oil tankers repositioning, route adjustments, capacity restoration, and refinery restarts—among other things—all requiring a lengthy repair cycle. In addition, although the geopolitical conflict has released “cooling” signals, this is likely only a verbal easing; substantive differences between both sides remain large, with significant uncertainty.

Be wary of tail high-volatility risk

Facing the current geopolitics-driven market volatility, multiple institutions believe global asset pricing logic has shifted and have proposed new response strategies.

Dong Wu Securities mentioned in a research report that the current market’s pace of gains and declines is heavily influenced by overseas factors, especially the so-called “TACO” cadence brought by Trump’s remarks (that is, the alternation between conflict escalation and cooling). The institution suggested that investors may want to wait until the situation becomes clearer before deciding on further investment directions.

Shenwan International Futures, from the perspective of risk hedging, suggested that if in the coming weeks negotiations show no substantive progress or if the conflict unexpectedly escalates, oil prices still carry a risk of a second leg higher. In terms of execution, it is necessary to closely monitor U.S.-Iran diplomatic feedback and the movement of U.S. ground forces. As for gold, given its unchanged long-term upward trend, large short-term swings may instead provide a window for medium- to long-term allocation.

Statistical institutions generally warn that within the “next two to three weeks” window, gold’s volatility trading and the reconstruction of the crude oil geopolitical risk premium will become the two main core storylines that global investors focus on, and tail high-volatility risks also need to be watched.

Haitong Securities cautioned that grasping the investment timing during risk events is crucial. The report noted that, based on CFTC (U.S. Commodity Futures Trading Commission) position data, asset management institutions’ net long positions have fallen 32% from 134k contracts on January 13 to 91k contracts on March 24, the lowest level in the past year; marginal selling pressure may be close to reaching the end of its cycle. The report further warned that before the Strait of Hormuz is reopened and the recycling of petrodollars resumes, investors still need to be wary of liquidity squeeze risks similar to those in mid-1974.

Yao Yuan, senior investment strategy officer at the Asia Institute of Investments Research, AXA Asset Management, suggested that investors should distinguish between short-cycle trading and long-cycle allocation. In the short term, the evolution of geopolitical conflict is hard to predict. If investors overweight risk assets, they should reduce exposure, increase cash, and hedge through energy, commodities, and derivatives.

For long-term allocation, Yao suggested using gold and physical assets to withstand geopolitical structural risks; increase allocations to Europe and emerging markets to hedge against the impact of a U.S. downturn in momentum; and also diversify investments across AI and the energy transition theme.

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