WTI US Oil traded near $87.10 per barrel on Monday, up 3.80% on the day. The move followed renewed Middle East tensions and concerns about supply disruption.
Prices rebounded from Friday’s low of about $78.89 after weekend developments raised doubts about the Washington–Tehran peace process. Oil had fallen after a ceasefire announced earlier this month, before recovering as uncertainty increased.
Iran’s foreign ministry spokesperson Esmail Baghaei said on Monday that Tehran would not join a second round of talks due in Pakistan on Tuesday. He linked the decision to US actions and an alleged breach of the ceasefire.
The comments followed reports that the US intercepted and seized an Iranian-flagged cargo vessel in the Gulf of Oman on Sunday as part of a maritime blockade. Iranian officials said they would retaliate, and state media said Iran could leave the diplomatic process if the blockade stays.
Attention has focused on potential disruption to shipping via the Strait of Hormuz, a key oil transit route. Limits on flows through the strait could tighten supply and lift prices.
WTI remains below earlier levels of around $106.50 this month. It is also below the near five-year high of $113.28 reached in March.
With WTI oil recovering to $87.10, our immediate focus is on the renewed US-Iran tensions. The risk of supply disruptions through the Strait of Hormuz, a chokepoint for nearly 20% of global daily oil consumption, creates significant uncertainty. This environment suggests we are entering a period of heightened price volatility in the coming weeks.
Given the binary nature of the conflict—either escalation or a sudden return to talks—we should prepare for a sharp price move in either direction. Strategies like buying straddles or strangles on near-term contracts could be effective, as they profit from a large price swing regardless of the outcome. This protects us from having to correctly guess the political developments.
We are seeing the CBOE Crude Oil Volatility Index (OVX) climb back towards 45, a notable jump from the lows seen after the ceasefire was first announced earlier this month. We remember that during the peak of the conflict in March of last year, the index surged well above 60, showing how quickly volatility can expand. This historical precedent suggests current option premiums may still be cheap relative to the potential risk.
The potential for a price spike is amplified by an already tight global supply backdrop. With US Strategic Petroleum Reserve inventories remaining near 40-year lows after the significant drawdowns of recent years, there is less of a buffer to absorb a sudden shock. Furthermore, OPEC+ has largely maintained its production discipline, leaving limited spare capacity to quickly offset any lost barrels.
While a pure volatility play is prudent, the risk appears skewed to the upside given the physical seizure of a vessel and the aggressive rhetoric. For those with a bullish bias, we can use bull call spreads to define our risk and target a move back towards the $95-$100 range. This offers a cheaper way to position for gains than buying outright calls while managing our potential losses if tensions ease unexpectedly.
