WTI, the US crude benchmark, traded around $89.35 in early Asian hours on Thursday, recovering after renewed US-Iran tensions. Markets were positioned for the Energy Information Administration (EIA) report due later in the session. Fresh US strikes in Iran raised concerns about potential disruption to commercial shipping via the Strait of Hormuz, after the US military said it targeted a site it described as a threat to US forces and maritime traffic, and also intercepted multiple Iranian drones.
US inventory data pointed to a further draw in crude stockpiles. The American Petroleum Institute (API) reported that US crude oil inventories fell by 2.8 million barrels in the week ending 22 May, following a 9.1 million-barrel decline the prior week. A correction issued at 01:50 GMT on 28 May clarified that the 2.8 million-barrel figure came from the API report rather than the EIA.
Geopolitical Tensions and Market Reaction
We are seeing West Texas Intermediate (WTI) crude oil holding firm around $88.50 this morning, showing strength after a volatile week. The primary driver for this support is the renewed geopolitical heat in the Middle East, specifically concerning shipping lanes in the Strait of Hormuz. Traders are now pricing in a higher risk premium as a result of these tensions.
The situation reminds us of similar flare-ups in 2019 and 2022, where threats to the Strait of Hormuz caused short-term price spikes of over 5% in a matter of days. Recent naval confrontations and stalled diplomatic talks are creating uncertainty over the steady flow of nearly a fifth of the world’s oil supply. This uncertainty typically leads to higher implied volatility in the options market, making derivatives more expensive.
Inventory Surprises, Derivatives Strategies, and Market Structure
Adding to the bullish sentiment, the latest Energy Information Administration (EIA) report released yesterday showed a surprise draw in US crude stockpiles. Inventories fell by 3.1 million barrels, significantly more than the 1.5 million barrel draw that was widely expected. This larger-than-anticipated drop suggests that demand is robust as we head into the peak US summer driving season.
Given these factors, we believe the path of least resistance for oil prices is higher in the coming weeks. For derivative traders, this suggests positioning for upside by purchasing near-term call options, such as the July contracts, to capitalize on any potential price surge from a supply scare. This strategy allows for significant gains if tensions escalate while limiting the downside risk to the premium paid for the options.
We are also watching the structure of the futures curve, which has steepened into backwardation, where front-month contracts are more expensive than later-dated ones. This market structure signals a tight physical market and further supports a bullish outlook in the near term. Therefore, any dips in price are likely to be seen as buying opportunities by market participants.
