WTI was trading near $89.40 on Wednesday, up 2.33% on the day, as Oil regained ground alongside rising Middle East tensions. US President Donald Trump said further military action against Iran remained possible if negotiations with Washington continue to stall. Separately, US Central Command confirmed strikes on Iranian air defence systems, control centres and surveillance radar sites near the Strait of Hormuz, following the downing of a US Apache helicopter.
Focus has also turned to shipping risks around the Strait of Hormuz, which carries roughly one-fifth of global energy supplies, raising concerns over potential disruption to international Crude flows. On the data front, the EIA reported US Crude Oil stockpiles fell by 7.228M barrels versus forecasts for a 4M-barrel draw, after the prior week’s 7.974M-barrel decline. The combination of tighter inventories and heightened regional risk has helped keep WTI above $89.
Drivers of Market Strength and Risk Premiums
We see the current oil price strength as driven by both Middle East tensions and a fundamentally tight physical supply. The sharp drop in US crude inventories, confirmed again this week with a 5.8 million barrel draw, provides a strong floor under the market. This combination suggests price dips will likely be viewed as buying opportunities in the coming weeks.
We believe the market is still factoring in the significant risk of a disruption in the Strait of Hormuz. Historically, sustained tensions in this critical waterway have added a $10-$15 risk premium to crude prices, a pattern seen during similar escalations in 2019. The ongoing military posturing means this premium is unlikely to fade quickly.
Demand Outlook and Strategic Positioning
On top of the supply risks, we are entering the peak of the summer driving season with very strong demand signals. US gasoline demand surpassed 9.5 million barrels per day last week, a seasonal high that indicates robust consumption is here. This seasonal demand pressure will likely keep inventories drawing down through July.
Given this outlook, we are positioning for continued price strength and heightened volatility. We see value in buying call options on WTI for August and September delivery, as this allows for capturing potential upside from any escalation while clearly defining risk. Reflecting the market’s nervousness, the CBOE Crude Oil Volatility Index (OVX) has already climbed to 42, so we feel it is prudent to establish these positions before premiums rise further.
