The Democratic Party achieved a major victory in the U.S. midterm elections, causing oil prices to plummet more than 8% in a single day, as markets bet that the dramatic shift in Washington's political landscape will accelerate the end of the conflict in Iran. However, from Iran's hardline statements to the complex political games in the U.S., the prospects for a ceasefire are much harder to predict than oil price trends.

On Wednesday, the news of the Democratic Party sweeping both the House and Senate in the midterm elections triggered strong shocks in the energy market. WTI crude oil once dropped to $87.13 per barrel, with an intra-day decline of more than 9.3%; Brent crude oil fell to $93.22 per barrel, with an intra-day drop of about 10%, marking the largest single-day drop since May. As of now, WTI has stabilized around $88 per barrel, and Brent closed near $95. Meanwhile, North Sea crude oil prices fell to new lows, and European natural gas prices also dropped significantly.

What drove the market's violent reaction was a series of concentrated political signals. U.S. Vice President Vance publicly attributed the Republican Party's devastating defeat to the conflict in Iran, stating, "The reason we lost the election was this war," and mentioned that Trump himself acknowledged this on Tuesday night. Chuck Schumer, the Senate Minority Leader and a Democrat, immediately indicated that he would push to end the nearly nine-month-long conflict, claiming that some Republicans have already joined in. House Democrat Leader Hakeem Jeffries also stated that the Democrats would promote legislation to block Trump's tariff policies and end the war in Iran.

However, the market's "ceasefire expectations" carry the risk of being overestimated, as Iran has issued strong statements, clearly indicating that those who believe the midterm election results can change U.S. hostility towards Iran are "very mistaken." Meanwhile, Trump currently faces three options: launch a new round of strikes, reach an agreement as soon as possible, or maintain the status quo—each path is fraught with high costs.

Political landscape shifts, Trump's governing space shrinks

The Democratic Party won control of both the House and Senate in this midterm election, for the first time in decades breaking through several traditional strongholds of the Republican Party, bringing significant political defeat to the Trump administration. U.S. public opinion generally believes that Trump's governing space in the next two years will be significantly narrowed.

On a fiscal level, Democratic control of Congress means greater constraints on government military spending. Dennis Kissler, Senior Vice President of Trading at BOK Financial Securities Inc., stated: "Democrats controlling Congress may tighten U.S. military spending and push for an earlier end to the war." He also pointed out that the recovery of Middle Eastern oil exports, along with Trump's indication that there are currently no immediate plans to launch new strikes against Iran, are the main factors pressuring current oil prices.

In terms of foreign and military decision-making, Trump still retains considerable autonomy. Analysts suggest that although Congress theoretically can limit funding for military operations against Iran, the president still has broad executive powers regarding military actions, especially in cases where actions are already underway. Throughout his presidency, Trump heavily relied on executive orders, but such measures face risks of challenge from the Supreme Court. The hostile political environment in Washington is unlikely to directly force the president to change his stance towards Iran.

Iran's hardline statements cast shadow on negotiation prospects

Just as markets bet on ceasefire expectations, Iran issued a completely opposite signal. According to CCTV News, Iran's Supreme Leader Mujtaba made a statement on the 4th local time regarding U.S.-Iran relations, clearly stating that those who believe that the midterm election results can change U.S. hostility towards Iran are "very mistaken."

Mujtaba warned that any inclination to yield to "hegemonic enemies" would allow them to become even more outrageous. He emphasized that Iran's control of the Strait of Hormuz and destruction of U.S. military bases in regional countries is a response to U.S. aggression and a struggle against arrogance. He also stated that if U.S. aggression were to be repeated, Iran's response would be broader and the scale of the war would be greater than before.

Earlier this week, the Supreme Leader of Iran had allowed more room for negotiation representatives, causing Brent crude prices to cumulatively drop more than 14% since Monday. However, Iran subsequently dampened hopes, stating that the positions of both sides remain far apart.

The core issue in the negotiations lies in Iran's nuclear program. Trump has consistently insisted that Tehran must never possess nuclear weapons, but his stance on accepting Iran's development of a civilian nuclear program has been inconsistent. Recently, Iran has insisted that nuclear issue negotiations should be reserved for later stages, focusing initial negotiations on reopening the Strait of Hormuz, unfreezing overseas Iranian funds, and easing sanctions.

Additionally, reports indicate that Iran's guerrilla tactics have escalated, with regional officials, security companies, and analysts stating that in recent weeks, Iran has launched underwater drones carrying explosives, used rocket-propelled grenades, and sent personnel to install magnetic mines on ships, continuously disrupting oil transportation in the Strait of Hormuz.

Three paths, each fraught with difficulties

According to analysis, Trump currently faces three options: launch a new round of strikes, reach an agreement as soon as possible, or maintain the status quo—but each path is fraught with significant challenges.

If choosing a new round of military strikes, the U.S. has already deployed two aircraft carrier strike groups in the Middle East and nearby waters, with a third approaching the Gulf. According to media reports, this will constitute one of the largest military deployments by the U.S. in the region in decades. Such a large-scale military buildup is costly and reveals Trump's potential intentions. However, limited military actions are unlikely to fundamentally shake the Iranian authorities, while a larger scale operation could plunge the U.S. into an extremely unpopular war quagmire. Given the strong opposition among voters to war, the probability of large-scale actions is quite low, but smaller scale operations could result in more casualties and further damage to energy infrastructure, while the negotiation positions of both sides are unlikely to change as a result.

If opting for a rapid agreement, the risks are similarly significant. If the agreement fails to effectively limit Iran's nuclear program, Trump will face the political embarrassment of "acknowledging defeat"—something he is particularly unwilling to bear. If the agreement focuses solely on reopening the Strait of Hormuz, it may temporarily lower oil prices, but the core issues would remain unresolved, and Iran's influence in the region would surpass that prior to the war, damaging U.S. relations with Gulf allies and sowing the seeds for new conflicts.

If maintaining the status quo, uncertainty in the energy market will persist. Since the outbreak of the conflict, energy flow through the Strait of Hormuz dropped nearly to zero, but in recent months has rebounded to about 80% of pre-war levels under the escort of the U.S. Navy, yet oil prices remain about 40% higher than before the war, reflecting the market's continued premium on oil transportation risks in the Middle East. Meanwhile, U.S. domestic distillate oil inventories fell below 100 million barrels last week, the lowest level since 2003, and national crude oil inventories have declined for the fifth consecutive week, indicating that the structural tension in the fuel market is unlikely to ease in the short term.

Market's "ceasefire expectations" carry overestimation risks

In summary, the logic reflected in this drop in oil prices is built on a series of yet-to-be-actualized political assumptions. The Democratic Party's control of Congress indeed compresses Trump's operational space on military spending and legislation, but it does not fundamentally strip him of his foreign and military decision-making powers.

Iran's hardline statements indicate that Tehran does not intend to concede due to Washington's political shifts; meanwhile, after suffering a serious political blow, Trump's willingness to accept an agreement detrimental to his image may be lower rather than higher. The weakening of Trump's political position precisely gives Tehran "no reason to quickly agree to a detrimental agreement."

Market bets on ceasefire expectations are essentially an optimistic judgment that Washington's political logic will override regional geopolitical realities. However, based on existing signals, the true outlet of this war is still far from coming.

Risk warning and disclaimer

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