WTI Oil retreats below $89 despite persistent tensions around the Strait of Hormuz

WTI Oil loses more than 1% on Friday, although geopolitical risks continue to sustain a significant risk premium.
US military escorts of commercial vessels through the Strait of Hormuz ease immediate concerns over supply disruptions.
Renewed hostilities between the US and Iran keep the risk of disrupted Oil flows through the strategic route elevated.

Ghiles Guezout FXStreet

West Texas Intermediate (WTI) US Oil declines 1.21% on Friday and trades around $88.55 per barrel at the time of writing. The Crude Oil remains close to its recent highs and is still heading for a strong weekly gain as tensions between the United States (US) and Iran maintain a significant geopolitical risk premium in the Oil market.

WTI comes under some selling pressure after US military forces escorted 40 commercial vessels carrying around 18 million barrels of Oil through the Strait of Hormuz on Tuesday. The operation helps reassure investors about the ability of tankers to navigate the strategic route and temporarily eases concerns over a major disruption to supplies.

Risks nevertheless remain elevated. Iran targeted US military bases in Kuwait and the United Arab Emirates (UAE) on Thursday, while clashes around the Strait of Hormuz continue to fuel concerns about maritime security. US forces also reportedly intercepted a cruise missile and repelled several drone attacks during Tuesday's escort operation.

South Korea is also reportedly preparing to deploy military assets to help ensure freedom of navigation through the Strait of Hormuz. These developments show that, despite vessels continuing to transit under military protection, tensions remain high enough to sustain a risk premium in Oil prices.

The Strait of Hormuz remains at the center of market attention because of its importance for global energy exports. The possibility of further escalation between Washington and Tehran could therefore quickly revive concerns over Oil flows and limit the extent of WTI's correction.

Meanwhile, disruptions affecting refined products add to tensions across energy markets. Average US Diesel prices reached a record $5.82 per gallon on Thursday, according to GasBuddy data cited by Reuters in the provided source. Hostilities between the United States and Iran, combined with disruptions caused by Ukrainian strikes on Russian Diesel-exporting refineries, are contributing to tighter global supplies.

Conversely, comments from Russian President Vladimir Putin expressing openness to potential peace negotiations provide a modest counterweight to geopolitical risks. For WTI, however, developments around the Strait of Hormuz and the ability of US forces to ensure the safe passage of Oil tankers remain the main short-term drivers.

WTI Oil FAQs

What is WTI Oil?

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.

What factors drive the price of WTI Oil?

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.

How does inventory data impact the price of WTI Oil

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.

How does OPEC influence the price of WTI Oil?

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.

Author

Ghiles Guezout

FXStreet

Ghiles Guezout is a Market Analyst with a strong background in stock market investments, trading, and cryptocurrencies. He combines fundamental and technical analysis skills to identify market opportunities.

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