The whole world expects President Trump to end the Iran war any day now. Trump keeps insisting he's in no rush. And through it all, oil markets are weirdly chill. These facts, as it turns out, are locked in a toxic relationship.
When the war broke out, experts warned that if the Strait of Hormuz stayed closed for more than a few weeks, oil would hit $150 to $200 a barrel. The strait has now been closed for three months. Yet the most heavily traded crude sits at about $94 a barrel - not far from where it was in early March. Even after Trump told his Cabinet yesterday he didn't care about the midterms, crude prices jumped only 2 percent. “The math just doesn’t add up,” oil-markets analyst Rory Johnston told me. “For people like myself who spend all day analyzing this stuff, we’re looking at prices wondering: Am I going insane? What is happening?”
Part of the answer: the U.S. and other countries have dipped into oil reserves. But the bigger reason is investor psychology. For three months, the global oil market has been operating under the assumption that the Strait of Hormuz will reopen soon. That assumption rests on a deeper belief: that Trump will inevitably back down once the economic pain gets high enough. This is the TACO theory - Trump Always Chickens Out. “The market has correctly realized there’s an audience of one who will determine the outcome of this, and that’s Trump,” energy-markets specialist Arnab Datta told me. “Among traders, the assumption is that the pain can only get so high before Trump retreats.”
The logic is dangerously circular. Prices are low because investors expect Trump to end the war before prices get too high; but because prices are low, Trump faces less pressure to end the war. He's figured out he can calm markets just by gesturing at a peace deal. Call it the TACO equilibrium: it's kept the war going longer than almost anyone expected.
The belief that Trump will back down isn't baseless. After his “Liberation Day” tariffs in April 2025, the stock market lost trillions. Bond investors sold off U.S. Treasuries, sending interest rates soaring. Thirteen hours into his new trade policy, Trump backed off with a 90-day pause, citing markets getting “yippy.” Investors who bet he'd blink made a killing. A new Wall Street consensus emerged: buy the dip when Trump threatens, profit when he caves. This became the “TACO trade.”
Then, on February 28, the U.S. and Israel struck Iran. Brent crude spiked from about $70 to almost $120 in a week. On March 9, Trump announced the conflict was “very complete” and the strait had reopened (it hadn't). Oil fell below $90. TACO seemed vindicated - except Trump didn't follow through. The war dragged on. Oil crept above $110. On cue, Trump announced “very good and productive conversations” with Iran. Oil dropped to about $95. This pattern has repeated: rising prices, peace-deal announcement, falling prices, war continues.
The TACO theory has two core limitations. First, it's self-negating: traders assume higher prices will force Trump to end the war, but that assumption keeps prices lower. Second, it's easily gamed: Trump knows markets expect him to chicken out, so he acts like he's about to yield, prices cool down, and traders who bet against TACO lose big. “So we end up in this endless merry-go-round,” Johnston said. “Prices rise, Trump talks about a deal, prices fall, and then Trump suddenly feels like he doesn’t actually need to make the deal.”
This can't last forever. Markets are catching on: the impact of Trump's peace announcements on oil prices has been diminishing. More critically, the law of supply and demand looms. Countries are burning through stockpiled oil reserves quickly and could exhaust them within a month. “It’s a ticking clock,” Eurasia Group analyst Gregory Brew told me. “We’re losing 13 million barrels of oil every single day. Eventually that reality is going to set in. And when it does, prices are going to rise very very fast.”
Other economic pressures are building. The April U.S. inflation report showed prices rising at their fastest pace since mid-2023, largely thanks to the Iran war. Bond investors got nervous, sold Treasuries, and sent interest rates to their highest levels in nearly 20 years. “Equity investors have been ingesting large amounts of hopium that any day now Trump will come to his senses,” former Biden economic adviser Jared Bernstein told me. “But bond traders generally don’t have patience for hopium.”
Even chaos in the bond market, however, doesn't seem to move Trump. The same week Treasuries hit a record high, he declared he'd ordered his staff “not to rush” a settlement with Iran. For now, the TACO equilibrium holds - a delicate, absurd dance between a president who won't blink and markets that refuse to believe it.