WTI rose for a third straight session on Wednesday, reaching its highest level in nearly two weeks as fresh Middle East fighting reduced expectations of a near-term US-Iran agreement that could reopen the Strait of Hormuz. Prices were around $94 a barrel at the time of writing. Iran launched missile and drone attacks on Kuwait and Bahrain, and the US carried out “self-defense” strikes on Iran’s Qeshm Island, while talks were reported to be continuing and Tehran was said to have presented a four-stage proposal.
The Strait of Hormuz remained central to the negotiations, with Iran framing control of the route as a sovereignty issue; the waterway carries about 20% of global oil trade. The Financial Times reported the UAE is planning its first multi-fuel pipeline to move gasoline, diesel and jet fuel from Abu Dhabi to Fujairah without transiting Hormuz. Separately, the EIA said US crude inventories fell by 7.97m barrels last week versus expectations for a 4m-barrel draw, the biggest weekly decline since February.
Near-Term Bullish Outlook For WTI
We see the current environment as bullish for WTI crude oil prices in the near term. The escalating conflict in the Middle East, particularly involving Iran, introduces a significant geopolitical risk premium that is not yet fully priced in. This situation is amplified by the largest draw in US crude inventories since February, signaling a tightening market.
Market Volatility And Risk Premiums
This uncertainty is causing a spike in market volatility, which derivative traders should note. The OVX, a key measure of oil price volatility, has jumped over 25% this past week to 45.2. We believe this makes buying call options attractive to capitalize on potential sharp upward price movements toward the $100 mark.
The recent 7.97 million barrel inventory draw is a powerful signal of strong demand heading into the summer driving season. This drop places US stockpiles about 8% below the five-year average for early June. Consequently, any further supply disruptions in the Strait of Hormuz will likely have an outsized impact on price.
We are reminded of the 2019 tensions in the Strait of Hormuz, which caused a rapid 15% price spike in a single day. Given the current direct military exchanges, the potential for a swift move higher is very real. Traders should position for this upside while monitoring negotiation headlines closely for any sign of de-escalation.
