Crude oil extended its slide on Tuesday as early details of a US–Iran understanding fed expectations that the Strait of Hormuz could reopen. US benchmark West Texas Intermediate (WTI) traded at $77.77, the lowest since early March, after falling nearly 25% over the past four weeks. Reporting from Israel’s Haaretz, citing people familiar with the process, said the arrangement would release an estimated $24bn of frozen Iranian assets in exchange for a toll-free reopening of the strait.
Iran’s deputy foreign minister, Takht Ravanchi, said disputed nuclear matters would be addressed in a next phase, covering stockpiles, uranium enrichment and Iran’s nuclear needs. Attention later turns to the weekly US crude stock report from the American Petroleum Institute (API), which is expected to show a 4.5m-barrel draw in the week of 5 June after a 9.1m-barrel decline the previous week. Commercial oil reserves have fallen continuously since mid-April, while broader pricing dynamics continue to track supply and demand, OPEC production policy and the US dollar, with inventory figures also monitored via the Energy Information Agency (EIA).
Geopolitical Developments and Market Reaction
With WTI crude oil breaking below $78 a barrel, we see the developing US-Iran deal as the primary market driver for the foreseeable future. The potential reopening of the Strait of Hormuz and the unfreezing of Iranian assets are creating significant downward price pressure. This geopolitical shift is overriding traditional supply and demand signals for now.
The full reopening of the Strait of Hormuz cannot be overstated, as historically around 21 million barrels of oil per day, or 20% of global consumption, pass through it. Easing tensions in this critical chokepoint removes a substantial risk premium that has been built into prices for years. We believe the market is just beginning to price in this new reality of improved supply chain security.
Supply Prospects and Trading Strategies
We are positioning for a further decline in prices as the market anticipates the return of Iranian oil. Iran has the capacity to increase its output by at least 1 million barrels per day within months of sanctions being lifted, a scenario reminiscent of what occurred after the 2015 nuclear deal. This potential flood of new supply is a major bearish catalyst.
For derivative traders, this environment makes buying put options on WTI and Brent futures an attractive strategy to capitalize on expected weakness. Even with falling prices, implied volatility has risen over the past week, indicating the market expects larger price swings. We are focusing on contracts expiring in the next 45 to 90 days to capture the medium-term impact of the deal.
While the expected 4.5 million barrel drop in US stockpiles would normally be bullish, it is being overshadowed. We see these inventory draws as a secondary factor, reflecting strong summer demand that will soon be met with rising global supply. The market is forward-looking, and the prospect of more Iranian oil tomorrow outweighs the reality of fewer US barrels today.
Technically, WTI has broken through several key support levels during its recent 25% drop. We are now watching the $75 per barrel mark as the next major psychological and technical floor. A decisive break below this level could open the door for a slide towards the low $70s in the coming weeks.
