West Texas Intermediate (WTI) extended losses on Wednesday, dropping more than 3% as crude cargoes stranded in the Strait of Hormuz began filtering back into the market after an interim peace agreement between the US and Iran. WTI was trading near $70.20 a barrel, the lowest level since early March, and the pullback has unwound most gains linked to the Middle East conflict. The US move to temporarily lift oil sanctions on Iran is also expected to add supply to global markets.
Shipping flows offered fresh evidence of easing disruption: 72 ships exited the Strait of Hormuz over the past 24 hours, carrying 20 million barrels of oil, although officials said a full normalisation could take a few weeks. The US and Iran have not secured a final agreement, with talks still divided over Iran’s nuclear programme and the Strait’s future governance, while Iran and Oman are expected to introduce toll charges for transiting vessels. In the US, Energy Information Administration data showed crude inventories fell by 6.088 million barrels versus forecasts for a 5.1 million-barrel decline, following the prior week’s 8.262 million-barrel draw.
Immediate Bearish Pressure from Surging Supply
Given the sharp drop in WTI to the low $70s, we believe the path of least resistance for oil in the immediate term is downward. The de-escalation between the US and Iran is releasing a significant supply shock as stranded tankers in the Strait of Hormuz come back online. This rapid increase in available oil is overpowering the bullish news of a drop in US inventories.
We should position for continued price weakness by considering buying put options. The prospect of Iran adding over a million barrels per day to global supply, similar to what occurred after the 2015 nuclear deal, could keep a ceiling on prices for months. Current reports from OPEC+ observers suggest Iran has at least 1.2 million bpd of production that could be brought online within the next quarter.
Ongoing Volatility and Geopolitical Risks
However, this peace is fragile, and we must hedge against a sudden reversal. The proposed tolls on the Strait of Hormuz, which handles nearly 20% of global petroleum liquids consumption, could easily cause the interim deal to collapse and reintroduce a significant war premium. This creates a high-volatility environment where prices could snap back aggressively.
The options market reflects this tension, and we are seeing the CBOE Crude Oil Volatility Index (OVX) trading at an elevated level of 45, well above its historical average. This indicates that traders are pricing in the potential for large and sudden price swings in either direction. Therefore, strategies that profit from volatility, such as straddles, might be appropriate for those without a strong directional bias.
The recent EIA report showing a 6.088 million-barrel draw in US crude stocks is being ignored for now. We are seeing the market’s focus shift entirely from weekly inventory data to the larger geopolitical supply picture. Until there is a final, stable agreement in the Middle East, geopolitical headlines will remain the primary driver of price action.
