Crude Oil: The 'Risk Premium' was compressed, not extinguished

Recent pullback in crude oil prices from the channel support suggests short-covering, but the prevailing structure continues to reflect lower highs and lower lows, keeping the broader downtrend intact

Crude oil enters the second half of 2026 after completing one of the sharpest price reversals in recent history. The scale of the Q2 selloff was historic. Brent shed around $45 a barrel over the quarter, down 38 per cent, its worst quarterly decline since the 2008 financial crisis, while WTI dropped roughly $31 or 31 per cent, its steepest fall since the pandemic.  From the April peak, both benchmarks have given back around 40 per cent of their conflict-era gains. The oil shock that upended global energy markets for five months has, in price terms at least, almost completely reversed.  The supply picture explains a lot of that. Saudi Arabia more than doubled its shipping volumes in the weeks following the June MOU. Iran pushed nearly 50 million barrels of crude to market once the naval blockade lifted. Vessel traffic through the Strait of Hormuz climbed back above 10 million barrels per day.  Saudi Aramco then made its intentions clear by cutting the official selling price of Arab Light for Asian buyers by $11 a barrel, only the third time in over a decade it has offered the grade at a discount, with the other two coming during the price wars of 2015 and 2020. OPEC+ piled on with a fifth straight monthly output increase of 188,000 barrels per day from August, underscoring the group's commitment to regain market share and restore supply despite weaker market conditions.  But the demand side is not absorbing that supply the way it would have before the conflict. The EIA now expects global oil consumption to fall by 1.1 million barrels per day in 2026, a swing of 2.3 million barrels per day from what it was forecasting in February. Five months of elevated prices have done real and lasting damage to demand, particularly in Asia.  China has dramatically cut its Gulf crude purchases, drawing down stockpiles and switching to Russian and other alternative barrels. That shift in buying habits is unlikely to reverse quickly even as Hormuz reopens, which means the market is heading into a supply recovery with a demand base that has genuinely shrunk.  The diplomatic architecture that enabled a temporary normalization of flows remains fragile and continues to inject episodic volatility into markets. Core disputes over Hormuz sovereignty, proposed transit fees for passage, and the release of frozen assets were not resolved in the MOU, which was framed as a 60-day arrangement rather than a permanent settlement.  The collapse of the Bürgenstock negotiations in late June briefly lifted oil prices, demonstrating how precarious the truce has been and how quickly market attention can pivot back to geopolitical risk.  This week made the fragility impossible to ignore. Iran's Revolutionary Guard struck three commercial vessels transiting the strait, including a Qatari-flagged LNG carrier near Oman's coast and a Saudi-flagged supertanker. Washington responded by revoking the general licence permitting Iranian crude exports, requiring wind-down of remaining sales by July 17, and CENTCOM confirmed strikes against over 80 Iranian military targets.  Iran retaliated against US installations in Bahrain and Kuwait, Tehran branded both the licence revocation and the strikes a breach of the MOU, and its foreign minister warned that final peace talks hinge on US restraint. Brent surged to $74.2 and WTI closed at $70.4 on Tuesday, with gains extending into Wednesday as Brent pushed above $76 and WTI near $73.  For the remainder of July, the balance of risks does not favour a unidirectional rally. Structural headwinds from demand contraction and OPEC+ output additions point lower, while the geopolitical backdrop guarantees episodic price shocks that compress and expand the risk premium.  The market will therefore need to price both risks simultaneously with structural downside from supply and demand fundamentals, and episodic upside from a diplomatic arrangement that has already demonstrated it can fracture without warning.  The compressed risk premium can re-expand rapidly, and until the diplomatic framework matures into a durable settlement or collapses entirely, trading conditions will continue to oscillate between supply-driven easing and geopolitically-triggered repricings.  On the daily chart of MCX Crude Oil Futures, the contract remains within a broader bearish trend, although prices are attempting a recovery after rebounding from the lower boundary of the descending channel.  The recent pullback from the channel support suggests short-covering, but the prevailing structure continues to reflect lower highs and lower lows, keeping the broader downtrend intact. The RSI has rebounded above the 40 mark and crossed above its moving average, indicating improving momentum; however, it remains below the neutral 50 level, suggesting that bullish strength is yet to be fully established.  Immediate support is placed at 6,500, followed by 6,420, while 7,382 and 7,480 are expected to act as key resistance levels and major hurdles for a sustained recovery. The near-term technical outlook remains sideways to bearish, and a decisive breakout above the descending channel along with 7,382 would signal an improvement in sentiment, whereas a break below 6,500 could revive the prevailing downtrend and extend the decline toward lower support levels.  (Disclaimer: This article is by Kaynat Chainwala, AVP Commodity Research of Kotak Securities. Views expressed are his own.)