Oil loses its geopolitical premium

XTI/USD

Key zone: 80.00 - 85.00

Buy: 87.50 (on strong positive fundamentals); target 90.00-93.50; StopLoss 86.80

Sell: 78.50 (on a pullback following a correction); target 73.50; StopLoss 79.20

The oil market is gradually easing after the suspension of mutual attacks between the United States and Iran. Concerns over major disruptions to crude oil supplies from the Middle East have weakened, allowing prices to correct. WTI is once again testing the $80-per-barrel area, while Brent has retreated to around $84.

However, it is still too early to speak of full stabilization. The ceasefire remains extremely fragile, and shipping through the Strait of Hormuz has yet to be fully restored. This means that the geopolitical premium could quickly return to oil prices if tensions flare up again.

To recap:

• All previous interim agreements between the United States and Iran eventually collapsed following attacks on oil tankers and subsequent airstrikes.
• The latest EIA report strengthened the sellers' position. During the week ending July 17, U.S. commercial crude oil inventories increased by 2.0 million barrels to 411.7 million barrels. Gasoline inventories rose by 0.8 million barrels, while distillate inventories increased by 1.4 million barrels.
• Despite the weekly increase, commercial crude inventories remain approximately 6% below the five-year seasonal average. This suggests that the physical market is not yet facing an oversupply, although the latest data has noticeably weakened the short-term bullish case for further price gains.
• According to EIA estimates, Middle Eastern oil production and export flows will gradually return to pre-conflict levels. At the same time, around 1.4 million barrels per day may remain absent from the global market throughout the fourth quarter.

Meanwhile, negotiations between Iran and Oman continue over the full restoration of shipping through the Strait of Hormuz.

• One proposal under consideration is reopening the so-called "central passage," a route that vessels have largely avoided since the conflict began because of naval mines in the area.
• If an agreement is reached, this step could lay the foundation for direct negotiations between Washington and Tehran aimed at ending the conflict.
• Oman is serving as the mediator in the negotiations. Qatar, Pakistan, Egypt, and special representatives of the Trump administration are also participating in the diplomatic process.
• Omani mediators remain cautiously optimistic and expect positive signals to emerge within the next few days. However, there are still no guarantees of a successful outcome.

Despite the optimistic tone from the U.S. side, Iranian officials continue to insist that no official negotiations with the United States are taking place. This only underscores the persistent uncertainty surrounding the diplomatic process.

Against the backdrop of lower oil prices, sentiment across equity markets has improved noticeably.

Dow Jones futures gained 1.01%, S&P 500 futures advanced 0.98%, and Nasdaq 100 futures climbed 1.63%.

The correction in oil prices eased inflation concerns that had previously contributed to rising U.S. Treasury yields.

At the same time, the probability of further Federal Reserve rate hikes has declined. Nevertheless, inflation remains above the Fed's 2% target, while energy-related risks continue to be one of the key sources of uncertainty for policymakers.

In the coming days, market attention will focus on the FOMC decision, second-quarter U.S. GDP data, and the release of the PCE Price Index, all of which will help investors assess the strength of U.S. demand and the outlook for future monetary policy.

So, what's the bottom line?

The negotiation process continues, and the prospect of gradually reopening the Strait of Hormuz remains one of the main positive factors for the oil market. However, military and political risks remain elevated, and the success of diplomacy will depend not only on reaching agreements but also on their effective implementation, including ensuring the safety of maritime shipping.

The correction in oil prices has already provided relief to global equity markets. Lower energy prices have reduced concerns over accelerating inflation and the possibility of tighter Federal Reserve policy, improving overall investor sentiment.

At the same time, this week's Federal Reserve decisions could determine the direction of global financial markets through the end of the summer.

So we act wisely and avoid unnecessary risks.

Profits to y’all!