WTI edged lower after posting losses of over 1% a day earlier, trading around $89.40 a barrel during Asian hours on Tuesday. Prices eased as supply concerns moderated following an agreement between Iran and Israel to halt mutual attacks, a move prompted by an appeal from US President Donald Trump and which raised hopes of progress in peace negotiations.
Stability remains uncertain. Israel’s Prime Minister Benjamin Netanyahu said the war against Iran and Hezbollah “has not yet ended”, after Iran’s military confirmed it had ceased strikes against Israel, while Iran’s central military command warned of “much harsher and more crushing actions than before” if Israeli attacks continue, including in southern Lebanon. The pause followed exchanges in which Israel struck a petrochemical plant in south-western Iran it said was used to produce ballistic missiles, and Iran’s Islamic Revolutionary Guard Corps hit a similar facility in Haifa, after weekend Israeli strikes on Hezbollah positions in Beirut. Despite Trump’s comments that talks with Tehran should eventually ease oil prices, the Strait of Hormuz remains effectively closed under a dual US-Iran blockade, disrupting shipments of crude, refined fuels and natural gas.
Underlying Supply Risks Remain High
We see the current dip in WTI to near $89.50 as a knee-jerk reaction to the ceasefire news. The market is focusing on the temporary halt in attacks between Iran and Israel. However, the underlying supply risks remain extremely high given the statements from both sides.
The most critical factor, the dual blockade of the Strait of Hormuz, has not changed at all. Recent maritime analytics show tanker traffic through the strait is still down over 90% from normal levels, effectively taking millions of barrels per day off the market. This fundamental supply crunch makes a sustained price drop unlikely.
This supply disruption is now clearly visible in inventory data. Last week’s EIA report showed a surprise crude oil draw of 4.8 million barrels, far exceeding analyst expectations and signaling that the blockade’s impact is tightening the market. We expect this trend of inventory draws to continue as long as the strait remains closed.
Market Volatility and Positioning Opportunities
Implied volatility in the oil market, measured by the OVX, remains highly elevated at around 45, despite a slight dip on the ceasefire news. This indicates that options traders are still pricing in a significant chance of a major price spike in the near future. The current calm feels more like a pause than a resolution.
Historically, similar temporary de-escalations in the Middle East have often been followed by renewed conflict and sharp price increases. We only need to look back at the volatility spikes during the 2019 Gulf tensions to see how quickly sentiment can reverse. The warnings from both Tehran and Tel Aviv suggest this situation is no different.
Given these factors, we are treating this price weakness as a buying opportunity. The market appears to be under-pricing the significant risk that the fragile ceasefire breaks down. We will be looking at buying out-of-the-money call options, such as the August $100 calls, to position for a rebound in the coming weeks.
