WTI crude falls 4% as traders bet against US-Iran escalation

Oil prices reversed sharply on July 9 as markets priced in de-escalation after a single-day surge of more than 7 percent.

WTI crude plunged more than 4 percent on July 9, erasing the prior session's war-driven gains, as traders concluded the US and Iran were unlikely to resume hostilities after a weekend of intense strikes.

"Declining gas prices are welcome news for drivers as the summer road trip season shifts into high gear, but crude oil and gas prices could shift direction and move higher again if the peace process stalls," Marie Dodds, public affairs director at AAA Oregon/Idaho, said.

The drop follows a 7.4 percent surge on July 8 that pushed WTI to a two-week high after the US launched strikes on more than 80 targets in Iran and President Trump declared the ceasefire over. Iran responded by threatening to close the Strait of Hormuz to all maritime traffic. The reversal came as traders reassessed the probability of sustained conflict, with WTI retreating from the prior session's highs.

The 4 percent decline unwinds a portion of the war premium that had built since late February, when WTI traded at $67 per barrel before the conflict began. Prices had spiked as high as nearly $113 during the crisis. If de-escalation continues, further downside is likely; any renewed tensions could trigger an equally sharp reversal.

Supply pressures build alongside demand concerns

The selloff comes as supply-side pressures are also accumulating. OPEC+ said it will boost crude output by 188,000 barrels per day in August, adding to the 2.34 million bpd increase in June production that brought the cartel's output to 18.75 million bpd. US crude production stood at 13.86 million bpd in the week ending July 3, just below the record high of 13.862 million bpd set in November. The number of active US oil rigs rose to a 13-month high of 445, though that remains sharply below the 5.5-year high of 627 reported in December 2022.

Weekly EIA data showed mixed signals. US crude inventories unexpectedly rose by three million barrels, versus expectations of a 1.9 million barrel draw, while gasoline supplies fell by 1.9 million barrels and distillate stockpiles dropped by 4.38 million barrels. The IEA has warned that the Iran war's impact on global oil demand will be deeper than previously anticipated, forecasting world oil consumption will decline by 1.1 million bpd this year.

The last time oil prices experienced a comparable geopolitical whipsaw was during the initial weeks of the conflict in late February, when WTI swung from $67 to above $100 within days. The current trajectory hinges on whether the fragile peace process holds. With the Strait of Hormuz — through which about 20 percent of the world's oil flows — still operating well below its pre-conflict capacity of 100 to 130 ships per day, any disruption could quickly reverse the selloff.

The broader economic stakes are significant. Every $1 increase in crude oil translates to roughly 2.4 to 2.5 cents at the pump, according to AAA. The national average for regular gasoline stood at $3.79 per gallon as of early July, down from a year-to-date high of $4.564 in May but still 65 cents above year-ago levels. A sustained decline in oil prices would provide relief to consumers and reduce inflationary pressures, potentially shifting the outlook for Federal Reserve policy in the months ahead.

This article is for informational purposes only and does not constitute investment advice.