WTI extended declines for a third straight session, trading near $87.20 a barrel in Asian hours on Friday. Prices eased after reports that the US and Iran had tentatively discussed a 60-day extension of their ceasefire, a move that could allow unrestricted shipping through the Strait of Hormuz. Under the proposal, Iran would clear mines from the waterway within 30 days, though the terms remain unapproved and the outcome uncertain.
The US benchmark is down nearly 15% so far this month as expectations around US-Iran talks have weighed on crude. Separately, EIA data showed US crude stockpiles fell by 3.3 million barrels last week, extending the run of declines to six weeks, but the draw was smaller than the 4.1-million-barrel drop forecast in a Reuters poll. WTI, or West Texas Intermediate, is the US light, sweet crude benchmark distributed via the Cushing hub; like other grades, it is driven by supply-demand shifts, the US Dollar, OPEC production policy and weekly API and EIA inventory reports, which typically align within 1% about 75% of the time.
US-Iran Ceasefire Optimism and Oil Price Volatility
We are seeing oil prices continue their slide based on optimism around a potential US-Iran deal that would secure passage through the Strait of Hormuz. With WTI down nearly 15% in May 2026, the market is pricing in a significant de-escalation that is not yet finalized. The key risk for traders is a sudden reversal if these talks collapse, as any hint of failure could send prices soaring.
The uncertainty of the deal presents a clear opportunity to trade volatility, which remains elevated. Historically, geopolitical events create massive price swings, such as when Brent crude futures shot past $105 a barrel in February 2022 after the invasion of Ukraine. We should therefore consider strategies like long straddles or strangles, which can profit from a large price move in either direction over the next 60 days.
Inventory Draws, Spread Trades, and Risk Positioning
Adding to the bearish sentiment, the latest EIA report showed a crude inventory draw of 3.3 million barrels, smaller than the 4.1 million anticipated. While inventories have fallen for six straight weeks, this slowing rate of decline suggests demand might be softening more than expected. This data supports maintaining a short-term bearish bias, but we must be cautious as seasonal summer demand typically tightens the market.
We believe a more nuanced trade lies in the WTI-Brent spread, which currently sits around -$5.50. An agreement that reopens the Strait of Hormuz would disproportionately benefit the supply of Brent-priced crude, likely causing the spread to widen further. We saw a similar dynamic during the Arab Spring in 2011, when the spread widened to historic levels due to disruptions in Middle Eastern and African supply.
Given the significant downside already priced in, we should protect against a snap-back rally. Buying cheap, out-of-the-money call options for July and August would provide upside exposure if the Iran deal falls apart. The CBOE Crude Oil Volatility Index (OVX) is trading near 35, indicating that the options market is still pricing in significant uncertainty ahead.
In the immediate term, we will be closely watching for any official statements from the White House regarding the deal’s approval. The weekly API and EIA inventory reports remain critical data points to gauge real-time demand. Any unexpected large draw in inventories could quickly reverse the current downward price momentum.
