US Vice President JD Vance said on Monday that the Strait of Hormuz remains open and that a mechanism has been established to keep it that way, with coordination efforts continuing. The passage handles almost 20% of global energy supply. He added that technical talks linked to a peace deal with Iran will continue in the coming weeks, and said groundwork has been set for a final agreement.
Vance also said Iran has agreed to invite IAEA inspectors back, with inspections possibly beginning this week and potentially as soon as today. Separately, he said a mechanism is in place to halt escalation and clashes in Lebanon, alongside an effort to pursue a regional ceasefire as an ongoing discussion. Following his remarks, oil prices extended declines, with WTI down 1.8% at around $75.00.
Geopolitical De-escalation Shifts Market Focus
With the geopolitical risk premium rapidly vanishing from the oil market, we see a clear signal to position for further price declines. The comments about keeping the Strait of Hormuz open and ongoing talks with Iran remove the immediate threat of a supply shock. This shifts the market’s focus back to fundamentals, which are not as strong.
We believe selling volatility is the most direct response to this de-escalation. The CBOE Crude Oil Volatility Index (OVX) has already fallen from recent highs near 40 to the low 30s, and we anticipate it could fall further into the mid-20s, a level not seen since early 2025. This makes selling out-of-the-money call spreads on WTI futures an attractive strategy to capitalize on both falling prices and lower implied volatility.
Softening Fundamentals and Market Positioning
This diplomatic development coincides with a softening physical market. Last week’s EIA report showed a surprising build in US crude inventories of 1.8 million barrels, defying expectations for a draw during the peak summer driving season. This suggests that global supply continues to comfortably meet demand, limiting the upside for prices even without a conflict.
Market positioning data supports this bearish outlook. The most recent Commitment of Traders report revealed that money managers have cut their net-long positions in WTI for the second consecutive week. This indicates that large speculators are already exiting their bullish bets, creating downward pressure that we expect to continue.
We have seen this play out before, particularly during the negotiations for the 2015 Iran nuclear deal. In the months leading up to that agreement, crude oil prices steadily trended lower as the market priced out the conflict premium and priced in the prospect of increased supply. A successful outcome in the current talks could easily see WTI crude futures break below the key $70 per barrel support level in the coming weeks.
