Hedge funds have increased their bearish bets on US crude oil to the highest level in nearly five months, as market expectations grow for a preliminary peace agreement between the United States and Iran. Such a deal could lead to the stable resumption of Middle Eastern crude exports via the Strait of Hormuz.

Data from the US Commodity Futures Trading Commission (CFTC) shows that in the week ending June 16, asset managers raised their net short positions in WTI crude by 10,865 contracts, bringing the total to 102,895 contracts. This marks the largest net short position since January 27, a period just before the US-Iran conflict began, when persistent oversupply had weighed on oil prices for months.

Concurrently, figures released by the Intercontinental Exchange (ICE) late last week indicate that bearish bets on Brent crude also surged significantly, reaching a peak of roughly six months.

The rapid expansion of short positions comes as oil market investors position themselves for a potential flood of new supply. Currently, the US and Iran are engaged in negotiations for a lasting peace accord, and shipping traffic through the Strait of Hormuz is gradually returning to normal. Furthermore, the US has shifted its decades-long sanction stance, announcing exemptions on penalties for Iranian oil exports, which has amplified expectations for a future supply surge.

With Middle Eastern crude poised to re-enter the market, a near-term supply glut is becoming increasingly apparent. This pressure is particularly pronounced against the backdrop of significantly weakened purchasing demand from China, the world's largest crude importer, highlighting growing supply-demand imbalance pressures.

Bearish sentiment has also spread to the US diesel market. Net short positions for diesel on the New York Mercantile Exchange (Nymex) increased by 1,854 contracts last week to 22,214 contracts, setting a record high since March 3, during the early stages of the conflict.

Due to the Juneteenth holiday last week, the CFTC has delayed the release of this week's data from Friday to Monday.