Oil prices hit an 18-week low on Thursday, meaning the huge risk premium that has built up around this year’s conflict has completely declined and returned to pre-war levels. The engaging part is not the round trip, which was always likely once the fighting stopped, but that WTI continues to fall while there is a real flash point. Both sides are exchanging threats over tolls in the Strait of Hormuz, and yet the barrel of crude that relies on the waterway is trading as if the dispute barely registers.

Premium round trip to zero

The surge that took crude oil above $110 at the height of the conflict has completely reversed, and the benchmark is now trading below both the 50-period exponential moving average (EMA) near $83 and the 200-period EMA near $78. Strip away geopolitics and what remains is the market that existed before the war: oversupply, with the Americas led by the US, Guyana and Brazil pushing production to fresh highs and stocks near multi-year highs. This surplus never disappeared; it was masked by fear, and when the fear disappeared, the excess did exactly what the excess did to the price.

The fee is a tax, not a hold

Behind the alarming headline lies a distinction that the market has developed. Tehran, of which Oman is a coastal partner, insists on the right to charge tolls after the current toll-free window expires, calling the fee a service charge rather than a toll. Washington, which has promised to make the strait free, is trying to prevent this by investing about $100 billion in frozen Iranian funds, so far to no avail. However, a toll and a blockade are not the same thing: the levy increases the cost of delivering a barrel by a margin, but it does not remove a single barrel from the market.

Forcing requires constant movement

There is a deeper reason why threats ring hollow. The toll only brings in money while ships are still sailing, so Tehran, which has chosen to make money from the strait, has every reason to keep it open rather than close it: closing the waterway brings nothing, while taxing the passage brings in a fortune. Saber rattling doesn’t sound like a prelude to disruption, but like leverage relative to the charge, which is why the market responds to the supply risk headline with a shrug and a lower close. But this peace is not a guarantee, and a toll regime that Washington is unwilling to accept could still turn into disruptions that everyone shrugs off.

Cheaper oil will do the Fed a favor

The signal on various assets points to trouble for now. Falling oil is lowering headline inflation, and it is this easing that gives the hawkish Federal Reserve (Fed) cover to leave interest rates alone rather than raise them, thus tying this week’s tender US jobs data to a central bank no longer feeling locked in. Cheaper crude oil is doing some of the Fed’s work, and a barrel stuck in the high $60s keeps the disinflationary tailwinds alive.

Levels to watch

Resistance: The first ceiling is the $70 round number just above, and breaking through it quickly leads to the $72 area, which closed the recent bounce. Nothing structural will improve until crude oil regains the EMA 200 near $78 and the withering EMA 50 near $83, meaning the downtrend would be truly challenged.

Support: With such an extended momentum, there is nothing to lean on. The nearest shelf is near $65, and below that comes the lows of $60, where crude oil bottomed before the conflict lit the fuse. The daily Stochastic Relative Strength Index (Stoch RSI) falling near 6 indicates that selling is heavily overloaded, so a reflexive rebound will not surprise anyone, although oversold readings in a downtrend usually indicate pauses, not reversals.

Fallacy: The path of least resistance remains lower until proven otherwise. The war premium is gone and the underlying market is oversupplied while the only silver lining story is that it is rightly discounted as rent-seeking rather than lost supply, leaving nothing to stop the decline other than a leveling-off rebound. The trade is to tamp down rallies into the $70-$72 range rather than chase lows, with deeply oversold momentum that argues for patience with fresh shorts. A sustained rebound in the EMA 200 near $78 would result in a reversal from the bearish view; otherwise, the lower one remains the line of least resistance.

Daily spot chart of WTI