WTI slipped in early Asian trading on Tuesday to about $90.60 a barrel, after rising 4.71% in the prior session, as geopolitical risk premiums met softer demand signals. Prices had jumped following reports that Tehran had halted indirect talks with the United States, while Iran and allied groups in Yemen, Lebanon and Iraq were said to be planning a full blockage of the Strait of Hormuz and action around the Bab el-Mandeb Strait. An Axios post on X added that Iran deployed additional naval mines in the strait last week, developments that risk constricting flows through a key route for global oil and liquefied natural gas supplies.
US President Donald Trump said negotiations were still under way and suggested a memorandum of understanding to reopen the Strait of Hormuz could be reached within the coming week, as Lebanese authorities pushed for any extension of the Hezbollah–Tel Aviv ceasefire to cover all Lebanese territory. On the demand side, data pointing to stalling factory activity in China added pressure, and Goldman Sachs warned that weak consumption in China and Europe could undermine its fourth-quarter targets of $90 a barrel for Brent and $83 for WTI, even as it flagged the potential for Middle East supply disruption to lift prices.
Geopolitical Risks Versus Weakening Demand
We are looking at a market being pulled apart by two very different stories. The immediate geopolitical risk from the Middle East is creating a strong case for higher oil prices, especially with negotiations between the US and Iran halting. The potential blockade of the Strait of Hormuz, through which about one-fifth of the world’s daily oil supply passes, presents a severe and immediate threat to supply chains.
On the other hand, the demand picture looks weak and could pull prices down. Recent data shows China’s manufacturing PMI, while expanding slightly at 51.7, is still weighed down by a struggling property sector. Similarly, the latest Eurozone Manufacturing PMI is holding below 50 at 47.3, signaling an ongoing contraction in industrial activity that will curb energy demand.
Market Volatility and Trading Implications
This conflict between a major supply shock and weakening global demand creates a perfect recipe for extreme volatility. The contradictory headlines, from Iranian threats of a blockade to US statements about a potential deal, mean prices could swing wildly on any news alert. For derivative traders, this suggests implied volatility on oil options will remain elevated in the coming weeks.
Historically, geopolitical flare-ups in the Persian Gulf have led to sharp and sustained price spikes, and we see no reason this time would be different if the straits are blocked. With the OPEC+ meeting scheduled this week, the group’s decision on production quotas will be critical in signaling their response to the crisis. Any hesitation to increase supply would add further upward pressure on prices.
Given the current tension, we believe long-dated call options are being priced to reflect the risk of a full-scale blockade, making them expensive but a necessary hedge against a supply shock. Conversely, the weak demand fundamentals suggest any rally could be short-lived if the geopolitical situation de-escalates quickly. This environment rewards traders who can react swiftly to changing headlines rather than those holding a firm directional view.
