WTI slipped after trimming earlier gains, trading near $73.80 a barrel in Asian hours on Wednesday, as supply concerns eased on diplomatic momentum towards reopening the Strait of Hormuz. Qatari officials said an interim proposal had been drafted, and both Washington and Tehran signalled progress on restoring access to the route after President Donald Trump suspended planned US strikes on Iran to allow negotiations to proceed. Iran is also reviewing a framework that would let European nations clear naval mines from the strait, while talks with Oman focus on safeguarding trade routes, and Saudi Arabia is using Omani mediation to engage Yemen’s Houthi rebels to limit spillover into the Red Sea corridor.
In the US, crude inventories rose by 2.69 million barrels in the week to 31 July, against expectations for a 2 million-barrel draw, and followed a 3.3 million-barrel build the prior week. Excluding the SPR, commercial stocks have fallen by more than 58 million barrels over 16 weeks and are down 7.2 million barrels year-to-date, while the SPR dropped by a further 2.9 million barrels to 304.8 million, near an estimated operational minimum of 250 to 300 million barrels. Saudi Aramco continued operations using alternative pipelines, storage and export terminals.
Short-Term Downside Risk and Options Strategies
With WTI crude sliding to around $73.80 per barrel due to easing geopolitical tensions, we believe derivative traders should position for short-term downside. Given the sudden diplomatic progress in reopening the Strait of Hormuz, implied volatility is likely to contract, making short-call strategies or bear put spreads highly attractive for the coming weeks. Recent options market data shows a notable shift, with the oil put-to-call ratio rising as traders hedge against further price drops.
The unexpected 2.69 million barrel build in US crude inventories, defying expectations of a 2 million barrel draw, confirms that near-term physical supply is outpacing demand. We recommend traders look at near-month calendar spreads, specifically selling front-month contracts and buying deferred ones, to capture this growing market weakness. Historically, unexpected inventory builds during the late summer months put severe downward pressure on prompt-month prices.
Long-Term Positioning and Volatility Premium Capture
While near-term sentiment remains bearish, we must not ignore that the US Strategic Petroleum Reserve has fallen to 304.8 million barrels, which is dangerously close to its operational floor. This critical threshold historically triggers government repurchasing, which has previously created a strong price floor for WTI crude between $70 and $72 per barrel. Derivative traders should use the current price dip to accumulate longer-dated call options, preparing for a potential floor-driven rebound later this year.
Saudi Aramco’s ability to bypass regional disruptions using alternative pipelines also proves that physical supply chains are far more resilient than previously assumed. As the geopolitical risk premium continues to drain out of oil options, we advise selling premium through neutral strategies like iron condors. This approach allows us to profit from declining volatility as oil prices likely consolidate in a tighter trading range.
