Geopolitical Risk Premium Impact
US forces said they destroyed command posts of Iran’s Revolutionary Guards, plus Iranian air defence and missile launch sites. The reports said this reduced Tehran’s ability to carry out attacks. US interest-rate expectations also shifted after data on factory-level inflation. The CME FedWatch tool put the probability of rates being held steady in June at 53.5%, up from 42.7% on Friday. The ISM Manufacturing PMI report showed the Prices Paid sub-index rose to 70.5. This compared with estimates of 59.5 and a previous reading of 59.0. WTI is a US-sourced crude benchmark distributed via the Cushing hub. Its price is driven by supply and demand, global growth, political events, OPEC decisions, the US Dollar, and weekly inventory data from the API and EIA, which are usually within 1% of each other 75% of the time.Market Positioning And Inventory Risk
When we look back at the 2025 crisis, the surge in WTI to near $73 following the Strait of Hormuz closure established a new psychological floor for the market. That event introduced a significant geopolitical risk premium that we see has persisted into today’s trading. The memory of that supply shock means that traders are now quicker to react to any tensions in the Middle East. Even with the strait long reopened, volatility remains elevated, which is a direct consequence of the 2025 incident. The CBOE Crude Oil Volatility Index (OVX) is currently trading around 38, which is noticeably higher than the averages we saw prior to the 2025 conflict. This suggests that the options market is still pricing in a high probability of sudden price swings. In response to last year’s price instability, we have seen a significant ramp-up in non-OPEC production, particularly from the United States. The most recent Energy Information Administration (EIA) data shows U.S. crude output has now climbed to a record 13.5 million barrels per day. This increased supply provides a crucial buffer that helps to cap the upside potential of oil prices during minor disruptions. Simultaneously, the demand side of the equation remains constrained by the monetary policy decisions made in the wake of the 2025 inflation spike. The Federal Reserve, having been forced to hold rates higher for longer throughout last year, is keeping global economic growth in check. We see this reflected in recent global manufacturing PMI figures, which have been hovering just above the 50-point mark, indicating only modest expansion. For derivative traders, this environment points towards strategies that benefit from a range-bound, yet volatile, market. Selling out-of-the-money call spreads with strike prices above $85 per barrel could be a prudent approach to capitalize on the production cap. This allows traders to collect premium while betting that strong U.S. supply and cautious Fed policy will prevent a runaway price scenario like the one we briefly saw in 2025. Given the market’s heightened sensitivity, we must place an even greater emphasis on weekly EIA inventory reports. An unexpected large draw in inventories could easily trigger a sharp rally, testing the upper limits of the current range. Therefore, holding positions through these Wednesday reports carries significantly more risk than it did before the 2025 disruption. Create your live VT Markets account and start trading now.
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