WTI Sell-Off May Be Hiding Supply Warning

The price of West Texas Intermediate (WTI) oil has been falling sharply as hopes of a US-Iran agreement resurface, but market indicators suggest that the sell-off may have gone too far. WTI prices have dropped by nearly 20% since reaching a peak above $92 per barrel in late July, and are currently trading below $76.

The steep decline is largely due to a decrease in the geopolitical premium, but it's not clear if this means that the underlying disruption has ended. Market participants have repeatedly priced an imminent settlement before attacks or shipping restrictions returned, only for negotiations to break down again.

One key indicator of potential supply issues is the WTI curve, which remains in steep backwardation. This means that buyers are still willing to pay more for prompt delivery than for oil one year ahead, suggesting that there may be a shortage in the near term but not in the long term. However, this also creates positive roll yield for long positions, potentially limiting bearish momentum.

Commercial crude inventories have been rising, but remain 6% below their 5-year seasonal average, and Cushing stocks are more than 10 million barrels below their 5-year comparison. Refinery utilization has remained strong at 96.1%, while total petroleum demand has rebounded by just over 1 mbpd on the week.

Despite these indicators of supply tightness, US crude production slipped by 63K bpd to 13.798 million in the week ending July 17, and Baker Hughes counted 450 oil-directed rigs on July 24, down two on the week but still ten higher than four weeks earlier and 38 above the comparable 2025 level.

The CFTC positioning suggests that speculative traders are no longer positioned for an extreme collapse, but they are far from crowded long. A credible peace agreement may still trigger fresh selling, but another breakdown in negotiations could force both renewed short covering and new long demand, amplifying the upside response.