Midterm Elections End, Oil Prices Plunge: Will the Market's "Ceasefire Expectations" Materialize?

Original author: Zhao Ying

Original source: Wallstreetcn

Democrats won a landslide victory in the U.S. midterm elections, and oil prices plunged more than 8% in a single day as the market bet that a dramatic shift in Washington's political landscape would accelerate the end of the Iran war. However, from Iran's hardline stance to the intricate political maneuvering in the United States, the prospects for a ceasefire are far harder to predict than oil price movements.

On Wednesday, the news that Democrats swept both the Senate and the House in the midterm elections sent shockwaves through energy markets. WTI crude briefly fell to $87.13 per barrel, a intraday decline of more than 9.3%; Brent crude dropped to $93.22 per barrel, down about 10% intraday, marking the largest single-day drop since May. As of now, WTI has stabilized around $88 per barrel, while Brent closed near $95. Meanwhile, North Sea crude prices fell to new lows, and European natural gas prices also dropped sharply.

What drove the dramatic market reaction was a series of political signals released in quick succession. U.S. Vice President Vance publicly blamed the Republican rout on the Iran war, saying bluntly that "the reason we lost the election is this war," and noted that Trump himself acknowledged this on Tuesday night. Senate Minority Leader and Democrat Chuck Schumer immediately said he would push to end the war, which has lasted nearly nine months, and claimed that some Republicans had already joined the effort. House Democratic Leader Hakeem Jeffries also said Democrats would push legislation to block Trump's tariff policies and end the Iran war.

However, the market's "ceasefire expectations" carry a risk of overestimation. Iran has taken a hardline stance, explicitly stating that those who believe the U.S. midterm election results can change Washington's hostility toward Iran are "gravely mistaken." Meanwhile, Trump currently faces three options: launching a new round of strikes, reaching a deal as soon as possible, or maintaining the status quo—each path is costly.

Political Landscape Upended, Trump's Room for Maneuver Narrows

Democrats won control of both the Senate and the House in this midterm election, capturing multiple traditional Republican strongholds for the first time in decades, delivering a major political defeat to the Trump administration. U.S. public opinion generally holds that Trump's room for maneuver over the next two years will be significantly narrowed.

On the fiscal front, Democratic control of Congress means greater constraints on government military spending. Dennis Kissler, senior vice president of trading at BOK Financial Securities Inc., said: "Democratic control of Congress could tighten U.S. military spending and push for an earlier end to the war." He also noted that the recovery of Middle East crude exports and Trump's statement that there are no immediate plans for a new round of strikes on Iran together constitute the main factors weighing on oil prices.

On the diplomatic and military decision-making front, Trump still retains considerable autonomy. According to analysts, although Congress could theoretically restrict funding for military operations against Iran, the president still has broad executive authority over military action, especially when operations are already underway. Trump has relied heavily on executive orders throughout his term, but such moves face the risk of challenges from the Supreme Court. Washington's hostile political environment is unlikely to directly force the president to change his stance on Iran.

Iran's Hardline Stance Casts Shadow Over Negotiation Prospects

Just as the market was betting on ceasefire expectations, Iran sent a diametrically opposite signal. According to CCTV News, Iran's Supreme Leader Mojtaba issued a statement on U.S.-Iran relations on local time the 4th, explicitly stating that those who believe the U.S. midterm election results can change Washington's hostility toward Iran are "gravely mistaken."

Mojtaba warned that any inclination to yield even slightly to the "hegemonic enemy" would only make it more brazen. He stressed that Iran's actions in controlling the Strait of Hormuz and destroying U.S. military bases in regional countries were responses to American aggression and part of a struggle against arrogance. He also said that if U.S. aggression is repeated, Iran's response will be broader and the scale of war will be larger than before.

Earlier this week, Iran's Supreme Leader had given negotiators greater leeway, and Brent crude prices had at one point fallen more than 14% cumulatively since Monday. But Iran then poured cold water on the optimism, saying the two sides' positions remain far apart.

The core sticking point in negotiations is Iran's nuclear program. Trump has consistently insisted that Tehran must never possess nuclear weapons, but his position on whether to accept Iran's development of a civilian nuclear program has been inconsistent. Iran has recently insisted that nuclear negotiations should be left for a later stage, with initial talks prioritizing the reopening of the Strait of Hormuz, the unfreezing of Iranian overseas funds, and the easing of sanctions.

In addition, according to reports, Iran's guerrilla tactics have escalated. Regional officials, security firms, and analysts say that in recent weeks Iran has deployed bomb-carrying underwater drones, used rocket-propelled grenades, and sent personnel to board vessels to install magnetic mines, continuously disrupting oil shipments through the Strait of Hormuz.

Three Paths, Each Fraught With Difficulty

According to analysts, Trump currently faces three options: launching a new round of strikes, reaching a deal as soon as possible, or maintaining the status quo—but each path is fraught with difficulty.

If a new round of military strikes is chosen, the United States has already deployed two carrier strike groups in the Middle East and nearby waters, with a third heading toward the Gulf. According to media reports, this would constitute one of the largest U.S. military deployments in the region in decades. A military buildup of this scale is costly and signals Trump's potential intentions. However, limited military action can hardly fundamentally shake the Iranian authorities, while larger-scale operations could drag the United States into a highly unpopular war quagmire. Given voters' strong opposition to the war, the probability of large-scale action is extremely low, but small-scale operations could cause more casualties and further damage energy infrastructure, while the negotiating positions of both sides would barely change as a result.

If a quick deal is chosen, the risks are equally significant. If an agreement fails to effectively constrain Iran's nuclear program, Trump would face the political embarrassment of "admitting defeat"—something he is particularly unwilling to bear. And if an agreement focuses only on reopening the Strait of Hormuz, it might压低 oil prices in the short term, but the core issues would remain unresolved, and Iran's regional influence would actually far exceed pre-war levels, damaging U.S. relations with Gulf allies and planting the seeds for new conflicts.

If the status quo is maintained, energy market uncertainty will persist. Since the war began, energy flows through the Strait of Hormuz briefly fell to near zero, and in recent months have recovered to about 80% of pre-war levels under U.S. Navy escort. However, oil prices remain about 40% higher than pre-war levels, reflecting a persistent market premium for Middle East oil shipping risks. Meanwhile, U.S. domestic distillate inventories fell below 100 million barrels last week, the lowest level since 2003, and national crude inventories declined for a fifth consecutive week. The structural tightness in fuel markets is unlikely to ease in the short term.

Market "Ceasefire Expectations" Carry Overestimation Risk

Taken together, the market logic reflected in this oil price plunge is built on a series of political assumptions that have yet to materialize. Democratic control of Congress does compress Trump's room for maneuver on military spending and legislation, but it does not fundamentally strip him of his diplomatic and military decision-making power.

Iran's hardline stance shows that Tehran does not intend to make concessions voluntarily simply because of Washington's political upheaval. And after suffering a major political blow, Trump's willingness to accept a deal detrimental to his image may be lower, not higher. The weakening of Trump's political position has precisely given Tehran "no reason to quickly agree to a deal unfavorable to itself."

The market's bet on ceasefire expectations is essentially an optimistic judgment that Washington's political logic will override regional geopolitical realities. But from the available signals, the real exit from this war is still far from arriving.