Oil is at a recent high despite a war de-escalation, and the shorting into the rally has largely stopped, ending the reversal pattern that defined the war.

Supply shocks continue: the Saudi East-West pipeline is closed, the Houthis hold a city on the Red Sea strait, and Chinese and US reserves are depleted.

Both sides have disengaged. Longs are selling into the rally in USO and XLE, while the shorts are not rebuilding. Realized volatility is below pre-war levels.

Oil is at a recent high even though the war is not running at an extreme pace.

Unlike earlier in the conflict, oil is no longer trading primarily on war headlines as supply disruptions continue.

The Saudi East-West pipeline that bypasses the strait was closed by Houthi attacks, cutting another 4% of global supply. The Houthis have captured a city on the Red Sea strait, the route to Suez, not the Persian Gulf.

Reserve dynamics have flipped from bearish to supportive: China is now rebuilding inventories rather than selling reserves, while US strategic reserves remain near their lowest levels since 1982.

The earlier shorting was a bet that the war would stop. The current move is not being driven by Iran war headlines.

XLE shows the same activity: no shorting on the way up, and longs selling.

Long interest has been falling as well recently; neither the shorts nor the longs are engaging as much as they were at the extremes.

The longs are selling into the rally; the shorts are not.

Realized volatility in USO has fallen below pre-war levels, suggesting war headlines are no longer the primary driver. Implied volatility remains near the middle of its wartime range as prices continue to trend higher.

Meanwhile S&P 500 (SPY) short interest is falling as the index goes higher, a momentum phenomenon.

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