Oil prices tumbled after the Strait of Hormuz reopened, with WTI dropping 4.8% to $78.30 per barrel and Brent falling 4.6% to $82.15, as supply disruption fears eased.

Market Context

Broader markets reacted positively to the news: the S&P 500 rose 0.3% to 5,210, while the 10-year Treasury yield slipped 5 basis points to 4.12%. The VIX, a gauge of equity volatility, fell 3% to 13.2, reflecting reduced macro uncertainty.

Analysis

The oil slide is reshaping expectations for Federal Reserve policy. Lower crude prices reduce near-term inflation pressure, giving the Fed more room to consider rate cuts later in the year. In the options arena, oil volatility (OVX) collapsed 12% to 28, its lowest level in three months, as market makers unwound gamma exposure from prior hedge positions. The collapse in OVX also reduced gamma exposure, prompting market makers to shorten delta hedges, which could amplify price moves if oil rebounds. Unusual call buying surfaced in energy ETFs: XLE calls at the $120 strike surged 40% above average volume, while OIH call activity jumped 25%, indicating traders betting on a rebound in energy equities.

Key Numbers

- WTI settled at $78.30 per barrel, down 4.8% ($3.94 loss).

- Brent settled at $82.15 per barrel, down 4.6% ($3.96 loss).

- Oil Volatility Index (OVX) fell 12% to 28, the lowest since early January.

- Fed funds futures pricing shows a 68% probability of a 25-basis-point cut by the September meeting, up from 54% prior to the Hormuz news.

- XLE call volume at the $120 strike rose 40% versus the 30-day average, while OIH calls were up 25%.

What to Watch

Traders will eye the Fed's April 30 policy meeting for any shift in guidance on rate cuts. Weekly EIA crude inventory data, due Thursday, could influence oil prices and the broader inflation outlook. OPEC+ output decisions expected in early May will be critical for supply dynamics. Options expiration on Friday may amplify moves in XLE and OIH as open interest rolls off. Technically, WTI faces support at $76.50 with resistance near $81.00; a break below $76 could reignite volatility.