WTI crude traded near $92.55 on Friday, down 3.28% on the day, after rising to recent highs earlier in the week. The move followed a reassessment of how quickly tensions between Iran and the United States might ease.
Iran’s Foreign Minister, Seyed Abbas Araghchi, is travelling to Pakistan for another round of indirect talks with Washington. Concerns remain about supply risks linked to the Strait of Hormuz, including disruption to shipping and sporadic military action.
US data also weighed on prices as the University of Michigan Consumer Sentiment Index fell to 49.8 in April, its lowest level in decades. Inflation expectations have risen, with higher energy prices listed as one factor.
These conditions have added caution around future oil demand in the United States. Geopolitical risks remain, but weaker sentiment and demand concerns have limited near-term price gains.
Given the sharp pullback in WTI, we are seeing a classic conflict between supply risks and demand fears. The uncertain US-Iran talks are adding to market nervousness, making straightforward directional bets difficult in the coming weeks. This environment suggests that volatility is the main factor we should be trading.
The drop in the University of Michigan Consumer Sentiment to 49.8 is a serious warning for oil demand. We saw a similar situation back in mid-2022 when the index hit a low of 50.0, which was followed by a nearly 8% drop in US gasoline demand over the next several months according to Energy Information Administration (EIA) data. This historical pattern suggests that strategies like buying put options or establishing bear put spreads could be sensible to protect against further price drops driven by a slowing economy.
However, we cannot ignore the persistent risk in the Strait of Hormuz, through which about 21% of global petroleum liquids consumption passes daily. Past events, such as the tensions in 2019, have shown that any military escalation can cause prices to spike sharply, even if only for a short time. This makes holding an outright short position extremely risky, and it may be wise to own some out-of-the-money call options as a hedge.
With these opposing forces at play, implied volatility is likely to be elevated, similar to levels we observed during the geopolitical shocks of 2022. For traders who believe a significant price move is imminent but are unsure of the direction, a long straddle or strangle options strategy would be appropriate. These positions would profit from a large swing, whether it is a supply-driven spike or a demand-driven collapse.
Alternatively, if we believe these factors will cancel each other out and keep oil prices within a defined range, selling premium could be the better approach. An iron condor, for example, would allow us to profit if WTI remains stuck between its geopolitical support floor and its economic resistance ceiling. This would capitalize on the idea that the upside is capped while the downside is cushioned by supply risks.
Recent figures from the Energy Information Administration have indicated a surprising build in US crude inventories, adding weight to the weakening demand narrative. This build, coming at a time of year when inventories typically begin to draw down, reinforces a cautious outlook. It suggests the geopolitical risk premium is currently the main factor holding prices above $90 per barrel.
