WTI opened the week with a bearish gap and pulled back from last Thursday’s $92.25 peak, its highest level since 8 June. It later steadied after hitting a four-day low in Asia and traded near $84.00, down nearly 6% on the day. Price pressure followed a pause in the US bombing campaign after 13 consecutive nights of strikes on Iranian targets late on Friday, alongside Tehran’s suspension of retaliatory attacks, which reduced the geopolitical risk premium tied to the five-month US-Iran conflict.
However, supply-route risks tempered the sell-off. Traffic through Bab el-Mandeb fell on 26 July after Iran-backed Houthis in Yemen attacked Saudi oil installations on the Red Sea coast, while restrictions around the Strait of Hormuz kept concerns alive over potential disruption to global oil flows. The backdrop also includes intensified Russia-Ukraine strikes, CPC terminal outages and record-tight diesel markets, factors that have supported crude benchmarks even as traders await clearer signals on the Middle East situation.
Geopolitical Tensions and Options Strategy
We are seeing WTI crude fall rapidly toward the $84.00 level as diplomatic talks between the US and Iran temporarily defuse geopolitical tensions. This sudden shift has triggered a sharp contraction in implied volatility, making long option positions highly risky right now. We suggest derivative traders avoid buying expensive puts to chase this downward momentum, as the premium is already decaying quickly.
Historically, WTI crude finds strong support near its 200-day moving average during geopolitical cool-offs, which currently sits near the $78 to $80 range. Furthermore, actual shipping volumes through the Bab el-Mandeb Strait dropped significantly on July 26 following Houthi attacks, indicating that physical supply remains incredibly tight. Because of these physical constraints, we expect the downside to be limited, preventing a total collapse in prices.
Trading Recommendations and Inventory Watch
To capitalize on this mixed environment, we recommend utilizing neutral-to-bullish options strategies such as bull put spreads. By selling out-of-the-money puts below the $80 support level, traders can collect high premium inflated by the recent conflict while staying protected against minor downward drift. This allows us to benefit from the high implied volatility rank without needing a massive directional rally.
We also need to watch the upcoming EIA inventory report on Wednesday, which historically swings oil prices by over 2% on heavy deviation days. If US commercial crude inventories continue to hover below their five-year average of roughly 440 million barrels, any bullish surprise will rapidly squeeze short sellers. We advise keeping position sizes small and waiting for the Wednesday inventory print before committing to larger directional futures positions.
