West Texas Intermediate extended its retreat for a third session, changing hands near $86.60 a barrel in early European trading on Friday. Prices eased as supply fears softened after reports of a tentative 60-day ceasefire extension between the US and Iran, which lifted expectations that shipping through the Strait of Hormuz could proceed without restrictions. The proposal would require Iran to remove maritime mines from the waterway within 30 days, although uncertainty persisted after CNN reported that President Donald Trump had not formally approved the terms; Vice President JD Vance said talks were close but “not there yet”, while reiterating the US could still set back Tehran’s nuclear programme.
ING, cited by Reuters, said reopening the strait might bring near-term relief, but full normalisation was uncertain because upstream output has fallen since the war began, with producers having shut in production to cope with acute storage constraints. On the demand-supply balance, the EIA reported US crude inventories fell by 3.3 million barrels last week, making it the sixth straight weekly decline, although the draw was smaller than the 4.1 million barrels expected in a Reuters poll, adding to the downward pressure on prices.
Ceasefire Prospects Introduce Near-Term Bearish Tilt
We see the market’s focus is entirely on the potential US-Iran ceasefire, which is driving WTI prices down around the $86 mark. The prospect of unrestricted shipping through the Strait of Hormuz is introducing significant potential supply back into the outlook. This has created a clear bearish tilt in the immediate term, which we should expect to continue as long as the deal appears likely.
However, we must factor in the high degree of uncertainty, as the deal is not yet final and awaits presidential approval. This creates a binary event risk, where prices could snap back sharply if talks fail. The CBOE Crude Oil Volatility Index (OVX) has reflected this tension, hovering near 38, making options strategies that benefit from large price swings, like straddles, logical considerations for the coming weeks.
Historical Precedent, Inventory Data, And Positioning Strategies
We have seen this pattern before, such as during the 2015 JCPOA negotiations with Iran. In the months leading up to that final agreement, crude prices trended steadily lower as the market priced in the return of Iranian barrels. This historical precedent supports a strategy of positioning for lower prices, perhaps through buying puts, upon official confirmation of the new deal.
The weaker-than-expected inventory draw of 3.3 million barrels last week adds to our cautious view. This figure is below the five-year average draw for late May, suggesting the start of the summer driving season is not pulling on stockpiles as robustly as anticipated. Coupled with recent Chinese manufacturing PMI data coming in at 49.8, slightly below consensus, the global demand picture appears lukewarm.
Despite the bearish short-term news, we believe the price floor will be firm due to structural issues. Upstream production cannot be switched back on overnight, meaning a true supply glut is unlikely in the next quarter. Therefore, selling out-of-the-money puts with strike prices below $75 for later-dated contracts could be a prudent way to collect premium while acknowledging this underlying support.
