WTI Crude Oil tumbles as prospective US-Iran accord eases Strait of Hormuz fears
- WTI plunges around $91.00 on Wednesday, down 8.91% on the day, after Axios reported a possible agreement between the United States and Iran.
- The proposed deal would reportedly include a gradual lifting of restrictions in the Strait of Hormuz and an easing of US sanctions on Iran.
- The sharp improvement in market sentiment significantly reduces the geopolitical risk premium embedded in Oil prices.
West Texas Intermediate (WTI) US Oil falls sharply on Wednesday and trades around $91.00 at the time of writing, posting an 8.91% daily decline as markets rapidly reassess geopolitical risks in the Middle East following reports from Axios suggesting major progress between the United States (US) and Iran.
According to Axios, Washington and Tehran are close to reaching a memorandum of understanding aimed at ending the conflict and opening a broader negotiation period regarding Iran’s nuclear program. The discussions reportedly include a gradual lifting of restrictions around the Strait of Hormuz, an Iranian moratorium on nuclear enrichment, as well as an easing of US sanctions alongside the release of billions of dollars in frozen Iranian funds.
The US news outlet added that the White House expects Iran to respond on several key points within the next 48 hours. A Pakistani source involved in the diplomatic efforts also confirmed to Reuters that both sides were “very close” to finalizing a deal.
The developments triggered a strong risk-on move across financial markets and led to a sharp decline in Oil prices, as investors rapidly unwind the geopolitical risk premium linked to potential supply disruptions.
The Strait of Hormuz remains a strategic chokepoint for the global energy market, with roughly one-fifth of global Oil flows transiting through the passage. Any lasting improvement in the regional situation mechanically reduces fears of disruptions to crude exports.
The bearish move accelerated after US President Donald Trump stated that “Project Freedom”, the operation aimed at fully restoring commercial shipping through the Strait of Hormuz, would be temporarily paused to allow diplomatic negotiations to proceed. US Defense Secretary Pete Hegseth also stated that the US-Iran ceasefire “certainly holds for now”, while emphasizing that Washington was not seeking renewed escalation.
The decline in Oil prices comes despite still-tight physical market fundamentals. The American Petroleum Institute (API) reported on Tuesday a decline of 8.1 million barrels in US crude inventories last week, far above the 2.8 million-barrel draw expected by the consensus. Goldman Sachs also warned that global Oil inventories are approaching their lowest levels in the last eight years.
However, in the short term, markets are clearly focusing on the improving geopolitical outlook, considering that a potential agreement between the United States and Iran could gradually normalize energy flows in the region and ease supply-related risks for global markets.
WTI Oil FAQs
WTI Oil is a type of Crude Oil sold on international markets. The WTI stands for West Texas Intermediate, one of three major types including Brent and Dubai Crude. WTI is also referred to as “light” and “sweet” because of its relatively low gravity and sulfur content respectively. It is considered a high quality Oil that is easily refined. It is sourced in the United States and distributed via the Cushing hub, which is considered “The Pipeline Crossroads of the World”. It is a benchmark for the Oil market and WTI price is frequently quoted in the media.
Like all assets, supply and demand are the key drivers of WTI Oil price. As such, global growth can be a driver of increased demand and vice versa for weak global growth. Political instability, wars, and sanctions can disrupt supply and impact prices. The decisions of OPEC, a group of major Oil-producing countries, is another key driver of price. The value of the US Dollar influences the price of WTI Crude Oil, since Oil is predominantly traded in US Dollars, thus a weaker US Dollar can make Oil more affordable and vice versa.
The weekly Oil inventory reports published by the American Petroleum Institute (API) and the Energy Information Agency (EIA) impact the price of WTI Oil. Changes in inventories reflect fluctuating supply and demand. If the data shows a drop in inventories it can indicate increased demand, pushing up Oil price. Higher inventories can reflect increased supply, pushing down prices. API’s report is published every Tuesday and EIA’s the day after. Their results are usually similar, falling within 1% of each other 75% of the time. The EIA data is considered more reliable, since it is a government agency.
OPEC (Organization of the Petroleum Exporting Countries) is a group of 12 Oil-producing nations who collectively decide production quotas for member countries at twice-yearly meetings. Their decisions often impact WTI Oil prices. When OPEC decides to lower quotas, it can tighten supply, pushing up Oil prices. When OPEC increases production, it has the opposite effect. OPEC+ refers to an expanded group that includes ten extra non-OPEC members, the most notable of which is Russia.