West Asia risks will dictate crude oil price discovery: Kaynat Chainwala

Crude is not trading under normal conditions. Until there is a durable resolution to the conflict, geopolitical risk will continue to dominate price discovery.

Disclaimer: This article is written by Kaynat Chainwala, AVP commodity research, Kotak Securities. Views expressed are his own. Readers' discretion is advised.

 

Crude oil has rarely demonstrated its sensitivity to geopolitical headline risk as starkly as it has over the past week. Brent swung from above $102 to below $83 and back toward $88 within five sessions, a range of nearly $20 a barrel driven almost entirely by alternating expectations of military escalation and diplomatic de-escalation rather than any meaningful change in the underlying physical balance.

 

Last week set the context. Brent ended roughly 10 per cent higher as missile exchanges between Washington and Tehran extended through a thirteenth consecutive night of US strikes on Iranian military and maritime targets. Houthi attacks on two Saudi-flagged tankers broadened the supply-risk geography, while diplomatic efforts from Pakistan and China kept hopes of resumed talks alive. The market headed into the weekend priced for conflict continuation. That view reversed sharply on Monday. Brent fell nearly 9 per cent and WTI dropped over 7 per cent after Iran signalled it would refrain from further attacks provided the US also stood down. The decline carried into Tuesday as Trump adopted a softer tone and attention shifted to Oman's mediation efforts on Hormuz. Iran's foreign minister held separate calls with his Saudi and Omani counterparts, with Oman proposing a regional mechanism that could allow Iran to collect voluntary transit fees, the most concrete normalisation framework to emerge since the June MOU collapsed. 

 

 

The optimism, however, proved short-lived. Today the US confirmed it had intercepted an Iranian ballistic missile targeting American military bases in the region, ending the brief pause in hostilities and sending Brent sharply higher. The episode reinforced the fundamental constraint that even if a ceasefire is announced, that does not immediately restore normal oil flows through Hormuz. Mines and other wartime disruptions cannot be removed overnight, and transit volumes are still well below pre-conflict levels.

 

Beneath the headline volatility, the physical market is telling a more instructive story. The 3-2-1 crack spread touched a record above $71 per barrel in mid-July before easing alongside crude, but remains around $64, still roughly 15 per cent above where July began. The fact that refining margins have compressed more slowly than futures prices is significant, it signals that end-consumer product tightness has not fully resolved even as paper traders priced in de-escalation. 

 

The EFP, the premium of Dated Brent physical barrels over futures, reinforces the same point. Through late June and into early July it ran deeply negative, reaching nearly -6 at its most extreme as the ceasefire-driven supply recovery flooded the spot market. That signal has since reversed sharply, touching nearly +5 during peak escalation and holding in positive territory today despite this week's futures selloff. Taken together, crack spreads and the EFP suggest the physical market has not bought the diplomatic narrative as fully as paper traders have.

 

The structural backdrop amplifies these signals rather than offsetting them. Prompt time spreads remain in backwardation despite narrowing from their highs, confirming the market is still pricing near-term scarcity even through the correction. OECD inventories are on track to fall to their lowest level since records began in 2003 by year-end per the EIA's June outlook, leaving little buffer to absorb a fresh disruption. Freight and war-risk insurance premiums for Gulf tankers remain at multiples of pre-conflict levels, embedding a cost layer into physical barrels that does not deflate with futures. And while OPEC+ retains spare capacity to partially cover any Iranian production loss, spare barrels are no substitute for open shipping lanes.

 

The broader fundamental outlook remains bearish. OPEC+ continues to restore supply, Chinese demand growth remains uneven, and elevated prices over recent months have already begun eroding consumption at the margin. Under normal conditions those forces would favor lower prices through the second half of the year. The problem is that crude is not trading under normal conditions. Until there is a durable resolution to the conflict and a credible timetable for restoring full Hormuz transit, geopolitical risk will continue to dominate price discovery. The result is a market in which fundamentals determine direction over the medium term, while headlines dictate the path taken to get there.

 

Crude Oil Aug Fut remains in a broader consolidation phase after witnessing sharp selling pressure, with price currently trading between key support and resistance levels. The RSI is hovering near 52, indicating weak momentum but not yet in the oversold territory, suggesting that selling pressure persists while the possibility of a technical pullback cannot be ruled out. 

 

A sustained breakout above 8,230 could signal renewed buying momentum and open the door for an upside move towards 8,750. Conversely, a decisive breakdown below 7,465 would indicate further weakness and may drag prices towards the 6,960 support zone. Until either of these levels is breached, the market is likely to remain range-bound, with sideways movement expected as traders await a directional trigger.