WTI extended its decline for a fifth session, trading near $75.60 a barrel in European hours on Wednesday, as markets assessed the effect of a prospective US-Iran interim accord due to be signed in Switzerland on Friday. The deal is expected to offer Tehran broad economic incentives and enable an immediate restart of Iranian oil exports. Shipping data indicated at least three tankers carrying Iranian crude have already passed the US naval blockade this week, while a fourth vessel, now empty, is heading towards the Gulf of Oman. Uncertainty over how quickly traffic can fully resume through the Strait of Hormuz helped temper the downside.
Pricing across Middle Eastern grades softened, with benchmarks moving into discounts and signalling loosening near-term supply. Reuters data showed Dubai’s premium to swaps slid to a discount of 46 cents on Tuesday, its first contango since January, and spot Oman and Murban differentials turned to discounts of 67 cents and 49 cents respectively. The shift into contango, where prompt cargoes trade below later-dated ones, comes as physical flows through the Strait remain below baseline levels despite progress on the political track.
Market Impact of US-Iran Agreement and Falling WTI Prices
With an interim US-Iran accord scheduled for this Friday, we are seeing WTI prices fall as the market prices out the geopolitical risk premium. The current level around $75.60 reflects the anticipation of new supply hitting the market very soon. This diplomatic progress is the most significant driver for crude oil at this moment.
We expect the market will soon need to absorb over 1 million barrels per day of additional Iranian oil, which is a substantial volume. This isn’t just a future possibility; the latest Energy Information Administration (EIA) report already showed a surprise inventory build of 2.1 million barrels last week. These data points confirm that the supply situation is easing rapidly.
The clearest signal is coming from the physical market, where key benchmarks have flipped into a contango structure. When prompt oil is cheaper than oil for later delivery, it tells us that the market is well-supplied for the immediate future. We view this as a strong bearish indicator that confirms the downward price pressure.
Strategic Positioning, Risks, and OPEC+ Response
Given these developments, we are positioning for further weakness in WTI over the next few weeks. Derivative strategies should lean bearish, such as buying put options or establishing short positions in futures contracts. The path of least resistance for oil prices appears to be lower as this new supply becomes a reality.
However, we must remain aware of the actual flow of tankers through the Strait of Hormuz, which accounts for roughly 20% of global consumption. While a deal is expected, any real-world delays or logistical hiccups in restoring full shipping capacity could create short-term price spikes. This means volatility may remain elevated even as the broader trend is down.
We are also watching for the reaction from OPEC+, as the re-entry of Iranian oil was likely not factored into their last production agreement. Historically, as in late 2023, the group has shown a willingness to cut output to defend prices against a weakening demand or rising supply outlook. Their decision will be critical for establishing a new price floor later in the year.
