US Treasury Secretary Scott Bessent told CNBC on Tuesday that negotiations with Iran to reopen the Strait of Hormuz could conclude as soon as Tuesday or Wednesday, and that he expected energy prices to settle back down.
The remarks prompted an immediate market response. West Texas Intermediate (WTI) Oil fell 3.29% to about $76.20 a barrel at the time of publication, having earlier touched a more than three-week low of $75.68.
Outlook for Oil Markets and the Geopolitical Risk Premium
We advise derivative traders to position for a further unwind of the geopolitical risk premium in the oil markets over the coming weeks. Historically, the Strait of Hormuz handles around 20 million barrels per day, which represents roughly 20% of global petroleum liquid consumption. With this vital chokepoint potentially reopening, WTI crude could easily test its next major support level near $72 per barrel as supply fears ease.
We expect a sharp contraction in oil market volatility, making long-option strategies less attractive right now. The Cboe Crude Oil Volatility Index (OVX) typically spikes during Middle East tensions and collapses rapidly once diplomatic resolutions are announced. Traders should look to sell premium through bear call spreads to capitalize on this impending implied volatility crush.
Trading Strategies and Risk Management Considerations
For those looking to capture the downward price momentum directly, we recommend utilizing debit put spreads targeting the $70 to $73 range for late August expiration. This strategy limits the impact of high premium costs while still positioning for a continued sell-off. We should also watch the Brent-WTI spread, which historically narrows when Middle Eastern shipping bottlenecks are resolved.
We must remain cautious and use tight stop-losses because any delay in signing the Iran agreement will trigger a violent short-squeeze. Past diplomatic efforts in the region have often faced last-minute hurdles, which can instantly reverse today’s 3.29% drop. We suggest keeping position sizes conservative until the official signatures are confirmed.
