WTI Oil tumbles as Strait of Hormuz deal optimism overrides US inventory drawdown
- WTI falls toward $73.20 and loses more than 2% on Thursday, bringing its weekly decline to more than 10%.
- Expectations of a swift reopening of the Strait of Hormuz are easing concerns about global supply.
- Markets are largely ignoring the sharp drop in US Oil inventories reported by the EIA.
West Texas Intermediate (WTI) Oil declines to around $73.20 at the time of writing on Thursday, down 2.35% on the day, and hits its lowest level in three months as investors continue to price in the prospect of a lasting easing of tensions in the Middle East.
Selling pressure intensified after the United States (US) and Iran signed a peace agreement on Wednesday. According to details released by US officials, the deal includes guaranteed safe passage through the Strait of Hormuz, a key artery for global Oil transportation. In exchange, Washington would grant sanctions relief on Iranian Oil exports, release frozen funds and contribute to a reconstruction fund aimed at covering war-related damages.
The Swiss Ministry of Foreign Affairs also confirmed that talks between US and Iranian representatives will continue on Friday at the Bürgenstock resort to negotiate the implementation of the agreement. These developments reinforce expectations of a gradual normalization of energy flows in the region and help ease concerns about global Oil supply disruptions.
For now, these developments are overshadowing otherwise supportive signals from the US Oil market. On Wednesday, the Energy Information Administration (EIA) reported that commercial Crude inventories fell by 8.262M barrels in the week ending June 12, almost double the 4.6M draw expected by analysts.
The agency also noted that this marked the tenth consecutive weekly decline in inventories, leaving US Oil stockpiles at their lowest level in more than 40 years. Under normal circumstances, such a significant reduction in available supply would provide support to prices. However, optimism surrounding the Washington-Tehran agreement continues to dominate market sentiment and is largely offsetting concerns about a tightening physical market.
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.
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Past performance is not a reliable indicator of future performance and/or results. Forward-looking scenarios or forecasts are not a guarantee of future performance. Actual results may differ materially from those anticipated.
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