Crude Oil at a Crossroads: Hormuz Diplomacy Puts the Bulls to the Test

From Ceasefire Hopes to Renewed Strikes, Hormuz Diplomacy Drives the Tape

Sentiment in crude oil has been dictated almost entirely by the on again, off again status of talks between the United States and Iran over the Strait of Hormuz, and that pattern is still setting the tone today. The war premium began unwinding in mid-June, after the United States and Iran signed a memorandum of understanding on June 17 aimed at pausing hostilities while negotiating a lasting end to the conflict. That de-escalation pulled Brent crude down from its post war highs to around 70.82 per barrel by July 2, essentially back to where prices stood before the war began on February 28. The calm proved short-lived. An Iranian drone struck a cargo ship transiting the Strait of Hormuz on June 25, and by July 7 Iran had fired on three commercial vessels in Omani territorial waters, unraveling the memorandum. Fighting escalated rapidly from there, with the United States launching multiple rounds of strikes against Iranian military targets between July 10 and July 13, Iran striking and disabling tankers in the Gulf, and shipping through the strait grinding to a near standstill, leaving thousands of seafarers stranded aboard vessels. Washington reimposed its naval blockade of Iranian ports and briefly floated, then dropped, a proposal to charge a 20% toll on cargo transiting the strait under U.S. protection. The latest turn has been toward diplomacy again. Iranian and Omani officials met in Muscat in recent days to work out new shipping routes, and reports this week put the two sides, along with the United States, close to a 60 day interim arrangement that would reopen Hormuz without transit tolls, using an Iranian coordinated route for inbound traffic and an Omani coordinated route for outbound traffic while mines are cleared from the main channel. A senior Gulf official put the odds of Iran and Oman finalizing that deal by Friday at 50-50, and Iran's deputy foreign minister has cautioned that even a bilateral Iran Oman understanding would not by itself guarantee the waterway reopens. Adding to the uncertainty, Houthi militants claimed a fresh strike on a Saudi oil tanker in the Gulf of Aden on August 5. On the macro side, the Federal Reserve held its policy rate steady at 3.50% to 3.75% on July 29, its fifth consecutive hold, with the next decision due September 16, and a prolonged Fed pause has kept the dollar relatively firm, which tends to work against crude prices from the demand side even as the Hormuz picture slowly improves.

What the Market Has Done

• Since June, the market has retraced down, breaking below 80 (Daily level 3) and down to the 70 area (Daily level 4), filling the gap caused by the war back at the end February.
• Responsive buyers defended that level, and price rotated back up to the 93 area (Daily level 2), but was not quite able to reach that swing high.
• Price has since eased back down below 80 (Daily level 3), which is also the midpoint of the current range between 93 and 70, confluent with the yearly VWAP.

What to Expect in the Coming Weeks

The key level to watch is the 80 area (Daily level 3), which is the midpoint of the current range between 93 (Daily level 2) and the 70 area (Daily level 4). This level is also confluent with the 2026 yearly VWAP and a longer term daily level dating back from December 2024 to 2025.

Bearish Scenario

• If sellers are able to hold down offers and cap rotation below 80, and buyers fail to defend the 70 area (Daily level 4), expect a move down back to the 62 area (minor daily level), and possibly to the 56 area (Daily level 5).
• A possible trigger for this scenario would be a successful finalization of the Iran, Oman, and United States interim agreement, with mines cleared from the shipping lane and tanker traffic through Hormuz returning to something close to normal levels. 

Neutral Scenario

• If buyers are still present at the 70 area (Daily level 4), and sellers do not hold offers at the 80 area, expect a swing back to 93 (Daily level 2) for two way rotation. Alternatively, expect these two way rotations to compress as the market re-establishes balance.
• A possible trigger for this scenario would be a partial or delayed implementation of the Hormuz agreement, where shipping resumes on a limited basis while Houthi attacks and mine clearance operations continue to introduce intermittent supply risk.

Bullish Scenario

• If buyers step up bids and the market is not able to rotate down to 70, and markets reclaim back above 80, expect a move back to 93 (Daily level 2), where responsive sellers are expected. A first clue that buyers may still be in control for continuation higher is if prices continue to compress against 93 (Daily level 2). If buyers break and accept above 93, expect a revisit up to 104 (Daily level 1).
• A possible trigger for this scenario would be a breakdown in the Hormuz talks combined with a renewed escalation, such as further Houthi strikes on tankers or Iranian action that again threatens the flow of roughly one fifth of global oil shipments through the strait.

Conclusion

Technically, crude oil sits at a pivotal juncture, with the 80 area acting as the fulcrum between a range bound market and a fresh directional break in either direction, reinforced by its confluence with the yearly VWAP and a longer term daily level from late 2024 into 2025. Fundamentally, the path of least resistance has leaned lower as the geopolitical premium rebuilt during July's renewed fighting continues to unwind through the developing Hormuz shipping agreement, even as sporadic Houthi attacks and the still unresolved question of who ultimately controls the strait keep a floor under how far that unwind can go. A Federal Reserve still on hold into its September meeting offers limited support from the demand side in the meantime. Watch how price behaves around the 80 pivot in the sessions ahead, since which side holds control there should offer an early hint of the next directional lean, though the market still needs to clear either the 93 or 70 boundary to confirm a true break out of the current two way range. What do you think, does the Hormuz diplomacy hold long enough to cap crude's upside, or is the market underpricing the risk of another flare up in the Gulf? 

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Disclaimer:

This article is provided for informational and educational purposes only and does not constitute financial, investment, or trading advice. The analysis presented reflects the author’s market observations and opinions at the time of writing and is not a recommendation to buy or sell any futures contract, security, or financial instrument. Futures trading involves significant risk and is not suitable for all market participants. Losses may exceed initial margin deposits, and market conditions can change rapidly.

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