WTI edged up after a 3.7% fall the prior session, trading near $80.10 a barrel in Asian hours as markets paused ahead of a potential US-Iran interim accord. US President Donald Trump said a memorandum of understanding had been signed to end the conflict and reopen the Strait of Hormuz, yet the absence of an official text from Washington or Tehran kept sentiment cautious. Shipping groups delayed transits through the waterway, while Iran’s Mehr news agency reported a draft plan to reopen the strait within 30 days under Iranian arrangements.
In anticipation of increased flows, the National Iranian Oil Company cut its July official selling price for light crude to Asia, reducing the premium to $7.15 a barrel above the Oman/Dubai average from $13 previously. The three-month Strait of Hormuz blockade has constrained a route that carries a fifth of global oil and liquefied natural gas supplies. Separately, US Department of Energy data showed the Strategic Petroleum Reserve fell by 8.9 million barrels last week to 340.3 million, the lowest since 1983, as part of an agreement to loan 172 million barrels to temper domestic fuel prices.
Volatility and Geopolitical Uncertainty
Given the market’s wait-and-see approach with WTI oil near $80, we are bracing for significant volatility. The CBOE Crude Oil Volatility Index (OVX) has climbed to nearly 35, reflecting the deep uncertainty surrounding the US-Iran peace accord. This tension between a potential supply flood and current tightness creates a tricky environment.
The main driver for a price drop is the reopening of the Strait of Hormuz and the return of Iranian oil. Iran is ready to increase exports by at least 500,000 barrels per day in the short term, and its aggressive price cuts to Asia show it is serious about regaining market share. This looming supply surge is the most significant bearish factor we see for the coming months.
We only have to look back at the 2015 nuclear deal for a historical parallel; in the six months after that agreement was announced, oil prices fell by nearly 40%. The current memorandum of understanding, if finalized, could trigger a similar downward price adjustment as the market prepares for more crude. This historical precedent suggests we should be positioned for lower prices once the deal’s text becomes public.
Supply Constraints and Risk Management
However, we must respect the current supply tightness that could cause sharp, short-term price spikes. The US Strategic Petroleum Reserve is at its lowest level since August 1983, leaving very little buffer to absorb any shocks or delays in the Iran deal. Any sign of the agreement faltering could send prices soaring on the back of this low inventory.
Therefore, our strategy in the coming weeks involves positioning for a drop in price while hedging against unexpected rallies. We are considering buying put options to profit from a potential slide below $75, or establishing bear call spreads to capitalize on high volatility and a likely price ceiling. These derivatives allow us to define our risk in case the geopolitical situation reverses course unexpectedly.
