West Texas Intermediate traded near $75.60 on Friday, up 0.21% on the day, but remained weighed down after this week’s slide. The contract was set for a weekly loss of roughly 10% as improving operating conditions in the Strait of Hormuz prompted traders to reassess Middle East supply risk and pared back the geopolitical premium in energy prices.
A 60-day memorandum of understanding between Washington and Tehran coincided with shipping traffic gradually resuming through the waterway. US Central Command said it had lifted maritime restrictions on vessels travelling to and from Iranian ports and coastal waters, while previously stranded crude cargoes began departing. US Vice President JD Vance said 12.5 million barrels of oil passed through the strait overnight without interference from Iran, as Kuwait signalled a gradual production increase; however, Rabobank flagged potential maritime fees after the 60-day period, and Deutsche Bank pointed to lingering uncertainty around longer-term negotiations.
Further Downside For WTI Amid Improved Supply Outlook
With the geopolitical risk premium rapidly unwinding, we see further downside for WTI in the immediate future. The resumption of shipments and planned production increases from Kuwait point to a market that is becoming better supplied. The latest Energy Information Administration (EIA) report showing a crude inventory build of 2.8 million barrels reinforces this bearish outlook, suggesting short-term prices have more room to fall.
Volatility And Strategic Positioning As The 60-Day Deadline Approaches
The sharp drop in crude prices has caused implied volatility to decrease, but we believe this presents an opportunity. While the CBOE Crude Oil Volatility Index (OVX) has fallen from recent highs near 40 down to 31, it remains elevated, reflecting uncertainty around the 60-day agreement. We see value in strategies that will benefit from an increase in volatility as the deadline for that agreement approaches in August.
While the transit of 12.5 million barrels through the Strait of Hormuz is a welcome development, this volume is still significantly below the pre-crisis daily average of roughly 21 million barrels. This indicates that the market is not yet functioning at full capacity and remains vulnerable to logistical or political hiccups. We are watching these daily transit figures as a key measure of how quickly supply is truly returning to normal.
We have seen this pattern before in previous geopolitical flare-ups, where initial risk premiums are quickly erased once supply routes are re-established. Therefore, we are considering selling out-of-the-money call options on front-month contracts to capitalize on decaying premium and a likely sideways-to-downward price trend. For the medium term, we are looking at purchasing longer-dated puts as a cost-effective way to hedge against the risk that negotiations fail after the 60-day period.
