Fragile West Asia crisis to keep oil volatility elevated, says analyst

Ceasefire optimism deflates the war premium

Crude oil markets are trading sharply lower today, giving back most of this month's conflict-driven gains as ceasefire signals between Iran and Israel pulled the rug from under the geopolitical risk premium.  WTI is currently near $88 and Brent around $91, leaving both benchmarks nearly flat on the month, WTI up just 0.8% in June and Brent fractionally lower, having surrendered the full 9–10% surge that defined the first three sessions of June.  The week began with the most serious breakdown in regional stability since the April ceasefire was agreed. Israel launched strikes on military targets in western and central Iran over the weekend, the IRGC responded with multiple waves of missiles toward northern Israel and warned of a full week of continuous strikes, and WTI briefly touched $95 while Brent crossed $98 as markets moved swiftly to reprice the risk.  The mood shifted almost as fast. Iran announced it had halted military operations against Israel, Trump flagged progress in Washington-Tehran talks, and Israel signalled it would hold fire for the moment, sending prices back down nearly as quickly as they had risen.  By Tuesday, WTI had slipped back below $90 and Brent surrendered most of Monday's gains, as the ceasefire narrative reasserted itself.  What this week has made clear is the shape of the market's reaction function. Escalation produces an immediate and sharp premium; any hint of de-escalation strips it out within hours.  The speed of both moves suggests traders are discounting the durability of each development rather than pricing either extreme as a base case. The result is a market that spikes hard on headlines and reverses just as hard, with the underlying range creeping wider each cycle.  The physical market offers a more grounded read. The EFP, the premium of Dated Brent over futures, stood at around $2 as of June 9, easing sharply from above $4 in the prior session.  That compression is meaningful: it tells you that the acute scarcity signal which drove the physical market well above paper pricing through April and May has moderated, even if it has not disappeared.  Gulf loadings remain very low, and the EFP holding above zero continues to confirm that the physical market is tighter than futures alone would suggest. Watching the EFP rather than the headline price is, for now, the cleaner signal on whether real supply stress is building or easing.  The diplomatic backdrop remains as complicated as it has been all month. Iran's precondition linking any agreement to $24 billion in frozen asset releases, combined with the deadlock over Lebanon and Gaza, leaves the core bargaining gap intact.  Tehran has warned that hostilities will resume if Israeli forces continue military operations in Lebanon, a condition Netanyahu has publicly refused, stating Israeli strikes in the south would continue as planned.  Trump, meanwhile, has said both sides are nearing a renewed truce and that Washington-Tehran communications remain open. The gap between those two positions is wide, and it is precisely that gap that keeps the Strait of Hormuz as the market's most consequential single chokepoint.  Adding a demand-side counterweight, China’s crude imports dropped to around 7.8 million barrels per day in May, the lowest in over eight years, as Asia’s largest consumer drew on inventories as weak refining margins and softer domestic fuel consumption have encouraged refiners to cut runs and delay cargoes.  OPEC+’s July quota increase of 188,000 barrels per day looks reasonable on paper but cannot be fully delivered while export routes remain constrained, making it largely a paper gesture until seaborne flows normalise.  Today’s US CPI print at 6:00 PM IST adds a macro layer as a hot reading strengthens the dollar, tightens financial conditions and compounds the demand headwind, while a softer number removes one bearish variable ahead of the 16–17 June FOMC and could give some breathing room to risk assets more broadly.  MCX Crude Oil Futures, prices are trading within a broad symmetrical triangle formation, characterized by a series of lower highs and higher lows, indicating ongoing consolidation within the larger range. The contract has recently faced rejection near the upper boundary of the pattern and remains below the key resistance cluster around 8,700–8,840, reflecting a cautious near-term undertone.  The Supertrend indicator remains in sell mode, while prices are hovering around the short-term moving average zone, suggesting the absence of a strong directional trend. Momentum indicators are subdued, with the RSI slipping below the neutral 50 mark, indicating weakening bullish momentum and a potential continuation of range-bound trade.  Immediate support is placed near 8,300–8,250, followed by stronger downside cushions at 7,900 and 7,555, whereas resistance is seen at 8,840, and 9,130. A decisive breakout above 8,840 could trigger fresh upside momentum toward 9,130, while a sustained breach below the rising trendline support near 7,900 may accelerate corrective pressure in the near term.

 

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(Disclaimer: This article is by Kaynat Chainwala, AVP - Commodity Research, Kotak Securities. Views expressed are her own.)