Oil prices have been edging down as trading reflects a possible 2-week extension of the US–Iran ceasefire and the return of peace talks. At the same time, physical supply has tightened as oil flows through the Strait of Hormuz have not restarted.
After allowing for pipeline diversions and limited tanker movement, about 13m b/d of supply is estimated to have been disrupted. Ongoing US blockade conditions could push that disruption higher.
Paper Physical Pricing Gap
A gap has opened between paper and physical pricing: dated Brent traded near $117/bbl, while front-month Brent futures settled a little below $95/bbl. The main upside risk cited is a breakdown in US–Iran peace talks.
With buyers switching towards US barrels, the US domestic market is expected to tighten while Middle East disruption continues. However, US drilling activity has barely changed since the conflict began.
EIA forecasts point to little change in US crude output this year. An increase in drilling would be expected to affect oil output more noticeably over 2027.
We are seeing a significant disconnect between the oil futures market and the physical reality on the ground. The price of physical Dated Brent is trading at a premium of over $20 to the front-month futures contract, a spread indicating extreme tightness. This divergence presents a clear opportunity, as futures seem to be pricing in a peace deal that is far from certain.
Positioning For Repricing
The physical market is tightening due to the ongoing disruptions in the Strait of Hormuz, which have taken an estimated 13 million barrels per day off the market. The latest IEA report confirms this, showing global crude inventories fell by 2.1 million barrels per day last week, the steepest drop this year. Yet, front-month Brent futures continue to languish below $100 per barrel, driven by hopes of a ceasefire extension between the US and Iran.
This situation mirrors the market conditions we saw in mid-2025 before the conflict escalated, where an underestimation of geopolitical risk led to a sharp price correction. Traders should consider positioning for the futures market to realign with the tight physical supply. The risk is heavily skewed to the upside should the fragile peace talks falter.
The expected US supply response has not materialized, creating further bullish pressure. The Baker Hughes rig count released last Friday showed a net addition of only three oil rigs, confirming that producers remain hesitant to ramp up drilling. This lack of investment means any meaningful increase in US output is unlikely to be felt until well into 2027, leaving the market exposed to supply shocks for the remainder of this year.
Given the low implied volatility, buying long-dated call options is an effective strategy to gain exposure to a potential price spike while defining risk. Alternatively, calendar spread trades that bet on the front of the curve strengthening further against deferred contracts could profit from the persistent physical tightness. We see the current futures price as reflecting an overly optimistic view of the geopolitical situation.
