Geopolitical Risk And Oil Price Reaction
Yemen’s Houthi movement fired missiles at Israel, raising risks around the Bab el-Mandeb Strait. The Strait of Hormuz remains effectively closed, and it normally carries about 21% of global oil consumption; Goldman Sachs puts the risk premium at $14 to $18 per barrel. Hormuz closures since early March are estimated to have removed 17.8 million barrels per day from normal flows, alongside Iraq force majeure on foreign-operated oilfields. OPEC+ has signalled no output rises before Q3 2026, while a 400 million barrel emergency release has not removed the deficit. The EIA projects Brent above $95 near term, then about $80 in Q3 and around $70 by year-end if the conflict ends and Hormuz reopens; WTI rose about 48% in March. The Fed held rates at 3.50%–3.75% on 18 March, signalled one cut in 2026, while CME FedWatch shows no cuts for the rest of 2026 and an 80% chance of a hold in April. Trump set an April 6 deadline for Hormuz to reopen, after a 10-day extension. Kharg Island handles roughly 90% of Iran’s oil exports; Goldman Sachs said prolonged closure could see Brent test the 2008 high near $147, while Wednesday’s EIA report is expected to show a 1.2 million barrel draw after last week’s build. With WTI crude holding above $100 per barrel, volatility is the primary factor to trade around. We can see this reflected in the CBOE Crude Oil Volatility Index (OVX), which has been trading above 55, levels that are historically high and signal extreme market uncertainty. For derivative traders, this means option premiums are incredibly expensive, making outright purchases of calls or puts a costly bet. The extreme headline risk from Washington and Tehran is creating a pronounced positive skew in the options market. This means call options, which bet on prices rising, are significantly more expensive than put options an equal distance from the current price, as the market fears a sudden upward spike more than a collapse. We last saw this kind of skew develop during the initial weeks of the conflict in Ukraine back in 2022, just before WTI surged toward $120.Trading Approaches Under Elevated Volatility
The upcoming April 6 deadline is a classic binary event, forcing a difficult decision on how to position. A diplomatic breakthrough could erase the $14 to $18 war premium almost overnight, while an attack on Kharg Island could trigger a move toward the $115 level. Given the high cost of options, using vertical spreads like bull call spreads or bear put spreads allows for a directional view with a defined risk and lower upfront cost. On the supply side, the de facto closure of the Strait of Hormuz has taken a significant amount of oil off the market, a situation which strategic reserve releases have failed to fix. Looking back, we saw a similar, though less severe, supply shock in the third quarter of 2019 after attacks on Saudi facilities, which caused Brent to gap up nearly 20% in a single day. The current disruption is far more prolonged and significant, supporting the market’s underlying strength. We must also consider the macro-economic backdrop, as the Fed is essentially sidelined by this energy-driven inflation. With the CME FedWatch Tool showing a near-zero probability of a rate cut in 2026, high energy prices are fueling the stagflation narrative. The weak February jobs report from last month, showing only 92,000 jobs created, highlights the economic fragility that Powell is trying to manage. For the immediate term, traders should watch the key technical levels as guides for intraday positioning. The daily chart shows strong support around the $95-$96 area, which could be a level to consider selling puts or establishing bullish positions if the market pulls back without a fundamental resolution to the conflict. A decisive close above the $101 mark would signal that the market is beginning to price in a failure of diplomacy ahead of the April 6 deadline. Create your live VT Markets account and start trading now.
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