Iran has established a red line and it's not the one that Washington would have liked to set. The Iranian negotiating team might not hold further talks with the United States until the latter withdraws from its current offers, a member of the Iranian negotiating team told the Fars news agency on Friday, giving a hard rebuke to the diplomatic push the White House had been pushing just one day ago. President Trump had told reporters that Washington and Tehran had agreed to "continue negotiations" despite his announcement of the underlying ceasefire "over. A response, via a state-backed outlet, which is not an official Iranian statement, is a bit like an opening move, and not a closing one.

The timing matters. The rebuff came hours after Ayatollah Mojtaba Khamenei, Iran's new supreme leader, vowed in his father's long-delayed funeral to “surely” take revenge for his father's death “because it is a demand of the nation”. He phrased it as necessary, even though we weren't here, it would happen "whether we are here or not. That is not talk only for the Iranian people; it is a message to Washington and Jerusalem: Any settlement will have to pass a test of a leadership generation that just buried its martyr and is now striving to demonstrate to everyone that it's not soft.

Beneath the political rhetoric lies a much more basic and specific issue who controls the Strait of Hormuz? Iran's top negotiator, parliament speaker Mohammad Bagher Ghalibaf, has made five conditions in the Islamabad memorandum for further adherence to the truce, including the naval blockade, toll-free passage, waiver of oil exports, and unfreezing the Iranian funds. Washington, on the other hand, now wants something Tehran has refused to offer so far this year an explicit and public statement that the strait is open to all shipping and that Iranian forces will not attack civilian vessels transiting it. Senior officials, speaking to reporters on the condition of anonymity, told them that it would have repercussions if they were not to make that statement, but did not elaborate on what those repercussions would be.

That standoff is already showing its effects in the economy on trading screens. Brent crude rallied to near $80 a barrel earlier in the week after the U.S. targeted dozens of Iranian military bases in its latest air raids and Tehran responded to American military bases in Bahrain and Kuwait but pulled back toward $76 on Friday, although prices remained about 5 percent higher for the week. Market analysts say traffic is about a quarter of pre-war levels at the Hormuz chokepoint, which under normal conditions transports nearly a fifth of the world's oil. Insurance against war risks for ships transiting through the Gulf has risen to about three percent of a ship's value, with some underwriters charging five percent, from about two percent a week ago and even a fraction of a percent before the war started. But a prolonged stand-off would stall the world's drive to replenish oil inventories that were used up in the earlier, much more severe disruption in the spring, when the price of Brent briefly surpassed $120 a barrel and container lines were paying tens of millions of dollars a week to reroute around the Cape of Good Hope.

Gulf producers are not waiting to see the diplomacy work itself out. The United Arab Emirates exported the country's largest output of crude last month as it sought to protect itself against just such a supply scare as now grips the market. Commodity strategists will continue to be divided on how this will play out. Some say Iran will eventually be forced to relinquish formal responsibility for any toll as the Gulf states and the Western shipping firms will not allow a toll system like that of Suez or Panama on a natural strait under international law. Others argue that Tehran has indeed changed the “rules of the game” and will continue to use its choke point to squeeze money for postwar reconstruction, whatever is agreed to on paper in a memorandum.

On the political side, the timing is not opportune for an American government as it prepares for midterm elections in November which would be keen to keep gas prices down, nor is it convenient for the Iranian government, which is seeking to show unity after burying its top leader who was struck by American and Israeli bombing. Other players are hedging their bets around the larger theater: Turkey's foreign minister has publicly stated that there is no reason for his country to go to war with Israel, while American officials have quietly met with a new and strengthened Lebanese army to advance the phased Israeli withdrawal from pilot zones in the country's south, an exception in the current wider paralysis.

All this doesn't indicate any imminent resolution. It suggests a negotiation that's stalled at the moment when both countries have the least political leverage: Iran, as the son of a slain leader must show his manliness; the United States, as it gives in to Iran, is giving in to the man who just tried to close one of the world's most vital waterways. The markets are reflecting the notion of a deadlocked situation, not a war, but the futures spread of premiums in both the tanker and crude markets imply that traders are hedging for more than the headlines are implying.