WTI slips below $74 after recent rally, Middle East tensions limit the downside

WTI corrects after two strong rally days and trades around $73.10, down nearly 2% on the day.
Rising tensions between the United States and Iran continue to support a geopolitical risk premium in the Oil market.
Concerns over potential supply disruptions through the Strait of Hormuz partly offset the unexpected increase in US Crude inventories.

Ghiles Guezout FXStreet

West Texas Intermediate (WTI) trades lower on Thursday and hovers around $73.10 at the time of writing, down 1.95% on the day as investors take profits following two consecutive days of strong gains. Despite the pullback, downside pressure remains limited as heightened geopolitical tensions in the Middle East continue to underpin Oil prices.

Tensions between the United States (US) and Iran escalated after a new wave of US strikes targeted Iranian positions. In response, Tehran launched attacks against several US military facilities in the Gulf and threatened further retaliation. Meanwhile, US President Donald Trump said that the memorandum of understanding with Iran aimed at easing the conflict was no longer in effect, reviving concerns about a renewed regional escalation.

Markets remain focused on developments surrounding the Strait of Hormuz, a strategic shipping lane through which nearly one-fifth of global Oil supplies transit. Iran's repeated threats to close the waterway continue to fuel concerns over potential supply disruptions, helping to maintain a geopolitical risk premium in Crude Oil prices.

ING analysts believe the market outlook will largely depend on whether Washington and Tehran can quickly de-escalate tensions. The bank also notes that Russia's temporary ban on diesel exports through the end of July is adding to concerns about refined product supplies and could further boost demand for US Crude.

Meanwhile, Commerzbank argues that the market may have underestimated the risks to global Oil supply. According to the bank, the apparent collapse of negotiations between Washington and Tehran highlights that the conflict is far from resolved, forcing investors to once again price in a higher geopolitical risk premium for energy markets.

Wednesday's data from the Energy Information Administration (EIA) showed that US commercial Crude Oil inventories increased by 2.998M barrels in the week ending July 3, marking the first build in 11 weeks and significantly exceeding market expectations. However, the report had little impact on price action, as traders remain primarily focused on geopolitical developments rather than short-term supply fundamentals.

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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