Escalation And Supply Risk
The US is reported to be preparing for a prolonged ground campaign in Iran, with thousands of troops being deployed to the region. President Donald Trump has also raised the idea of taking control of Iran’s oil resources, including the Kharg Island export terminal. Trump also indicated a shift on Cuba, saying he does not oppose countries supplying crude oil to the island. This comes as a sanctioned Russian tanker nears Cuba with a shipment described as critical, offering some relief amid an effective US-led oil blockade. The vessel, linked to Russia’s “shadow fleet”, has been tracked off Cuba’s eastern coast and is expected to dock soon, according to Reuters. The delivery is set to ease pressure on Cuba’s strained energy supplies. The brief dip in WTI to around $98.90 should be seen as a temporary pause, not a change in trend. We are now bracing for a significant spike in market volatility, likely pushing the CBOE Crude Oil Volatility Index (OVX) to levels not seen since the market panic of early 2022. This means option premiums are about to get much more expensive, making it costly to wait on the sidelines.Positioning And Volatility
The potential for a prolonged US ground campaign in Iran directly threatens nearly 3.2 million barrels of daily crude production from the market. Any disruption to the Kharg Island terminal, which handles the vast majority of Iran’s exports, would represent a severe and immediate supply shock. We remember how prices surged past $120 a barrel after the conflict in Ukraine began, and this situation has the potential for a similar, if not greater, impact. Furthermore, the expansion of Houthi strikes introduces a broader risk to shipping that we have become all too familiar with since last year. These attacks on the Red Sea chokepoint, through which about 10% of global seaborne oil travels, will inflate insurance premiums and freight costs. This adds a geopolitical risk premium to every barrel, regardless of its origin. Given this outlook, traders should be actively buying out-of-the-money call options or establishing bull call spreads to capitalize on upward momentum while defining risk. We believe positioning for a move toward the $115-$125 per barrel range is now a prudent strategy. Waiting for further confirmation will likely mean paying significantly more for the same positions. It is critical to remember that any government response will be limited. After the historic drawdowns of 2022 and only partial replenishment efforts through 2025, the US Strategic Petroleum Reserve still sits near a 40-year low of around 365 million barrels. This leaves very little buffer to absorb a supply shock of this magnitude, leaving the market dangerously exposed. The policy shift on Cuba and the arrival of a sanctioned Russian tanker is a minor development. The volume involved is insignificant when compared to the millions of barrels per day at risk in the Persian Gulf. We should treat this news as market noise that does not alter the overwhelmingly bullish primary thesis for crude oil in the coming weeks. Create your live VT Markets account and start trading now.
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