WTI extended declines on Wednesday as improving crude flows through the Strait of Hormuz pulled prices back towards pre-conflict levels, outweighing fresh US stockpile data. The contract was trading around $68.13 a barrel, down nearly 2.60% on the day, as the market pared back the geopolitical risk premium built during the US-Iran war.
US Energy Information Administration data showed commercial crude inventories fell by 3.775 million barrels in the week ended 26 June, the tenth straight weekly draw. The decline undershot expectations for a 5.1 million-barrel fall and followed a 6.088 million-barrel drop the prior week, while stockpiles slid to the lowest level since September 2018. Negotiations between Tehran and Washington remain unresolved, with disputes over inspections of Iran’s nuclear programme and control of Hormuz, including Iran’s push for transit tolls versus US calls for free passage. Separately, Reuters reported OPEC+ is expected to agree another supply increase on Sunday, with sources pointing to a rise of about 188,000 barrels per day in August, matching June and July.
Market Outlook and Trading Strategy
Given the current market sentiment, we see the path of least resistance for West Texas Intermediate as downward in the coming weeks. The combination of recovering crude flows through the Strait of Hormuz and an anticipated supply increase from OPEC+ creates significant headwinds. This suggests that the geopolitical risk premium that pushed prices higher is now largely gone.
We are positioning for this by looking at put options to capitalize on a potential slide towards the mid-$60s. Specifically, we find August contracts with strike prices around $65 to be attractive, as this timeframe allows for the market to fully digest the outcome of this weekend’s OPEC+ meeting. A gradual increase in short positions on WTI futures, with tight stop-losses above $70, is also a strategy we are implementing.
The recent price action, falling from over $85 a barrel during the peak of the US-Iran conflict last month, shows how quickly such risk can be priced out. The expected 188,000 barrel-per-day supply increase from OPEC+ is modest, but it signals to the market that the alliance is focused on preventing prices from overheating. This type of incremental increase has historically been effective at capping rallies.
Managing Volatility and Hedging Risks
However, the US-Iran deal remains tentative, which means volatility could return unexpectedly. The CBOE Crude Oil Volatility Index (OVX), which recently stood near 38, remains elevated compared to historical averages, indicating the market is still nervous. We believe it is therefore essential to hedge against a sudden reversal should negotiations fail.
To manage this risk, we are buying cheap, out-of-the-money call options as a hedge against our short positions. Implementing bear put spreads is another strategy we are using, which limits our upside profit but provides a defined and reduced risk if the price suddenly spikes. This protects our capital from any breakdown in diplomacy regarding the Strait of Hormuz.
We also note that the bullish inventory data should not be entirely dismissed, as it points to a tight physical market. US commercial stockpiles have fallen to their lowest level since late 2018, when they were consistently below 420 million barrels. This underlying tightness may provide a floor and prevent a complete price collapse below the low-$60s.
