Oil prices could drop to $55 despite Strait of Hormuz crisis

Yesterday 07:20

By: Dakir Madiha

Oil prices could drop to $55 despite Strait of Hormuz crisis

Brent crude has lost roughly a quarter of its value within days after surging to nearly $120 a barrel during the peak of the Strait of Hormuz crisis. A growing number of technical and market analyses now suggest the decline could extend much further, potentially pushing prices down toward $55 per barrel.

The rally that drove oil to its highest level in more than three years is showing signs of fatigue, according to an analysis published this week by BeInCrypto. Analysts point to several indicators that suggest weakening upward momentum.

One signal comes from a bearish divergence in the relative strength index, which shows that price gains have continued while momentum has begun to fade. Another warning sign is the sharp narrowing of the Brent backwardation spread. The gap between first and second month Brent contracts has fallen about 76 percent, shrinking from $9.38 to $3.09.

Market participation has also dropped significantly. Open interest in Brent futures has declined from more than 771,000 contracts to roughly 455,000, indicating that traders are closing positions as volatility rises. Chart patterns also show a potential reversal. Technical analysts highlight a head and shoulders formation that implies a possible price target near $55, with key support around $78.

The technical outlook aligns with a broader shift along the oil futures curve. The April 2026 contract for West Texas Intermediate crude settled near $95 per barrel, while the December 2026 contract traded closer to $73. The roughly $30 discount reflects expectations among traders that the supply shock linked to the Strait of Hormuz disruption may prove temporary.

Rebecca Babin, senior energy trader at CIBC Private Wealth Group, told Bloomberg that the recent rally could reverse as quickly as it began. She said sharp declines may follow the rapid surge that pushed prices higher during the conflict.

However, not all market signals point toward a major collapse. Options markets still show strong demand for protection against rising prices. The Kobeissi Letter reported that the one month call put skew on WTI crude futures has climbed to around 30, its highest level in at least four years. The figure exceeds even the peak reached during the energy crisis triggered by the Russia Ukraine war in 2022, suggesting traders still see a meaningful risk of another price spike.

The mixed signals reflect uncertainty surrounding the Strait of Hormuz, where Iranian attacks on infrastructure and oil tankers had effectively halted much commercial traffic. Brent rose above $114 in early March before dropping sharply after reports that U.S. President Donald Trump was considering military action to reopen the waterway.

On March 10 alone, WTI crude plunged 12 percent, the steepest single day decline since March 2022, according to Bloomberg.

Technical analysts now see $95 as a key short term pivot. Sustained trading above that level would weaken the bearish outlook and could reopen the path toward $104, according to analysis by Kase and Company published by the CMT Association. Conversely, a break below $78, which marks the neckline of the bearish pattern, would confirm a reversal and could lead to declines toward $67 and eventually $55.

Meanwhile, the U.S. Energy Information Administration has sharply raised its forecast for Brent crude in 2026 to $79 per barrel, up from $58 projected just a month earlier. The agency still expects prices to ease later in the year if shipping through the Strait of Hormuz resumes.

For now, oil markets remain caught between the risk of renewed geopolitical escalation and growing evidence that the recent surge may not be sustainable.