WTI crude fell after modest gains, trading near $85.40 a barrel in Asian hours on Tuesday. Prices eased as near-term supply concerns reduced, amid reports that Iran will send a delegation to Islamabad for a second round of talks with the US before the truce expires.
Bloomberg reported that US President Donald Trump said Vice President JD Vance will travel to Pakistan to restart negotiations, “either Tuesday night or Wednesday morning.” Trump also said the truce is unlikely to be extended if no deal is reached this week, and that the Strait of Hormuz will remain blocked until an agreement is secured.
Shipping through the Strait of Hormuz slowed on Monday after weekend tensions, with Iran reportedly firing warning shots at vessels and the US military seizing an Iranian cargo ship. Reuters cited ship-tracking data showing one vessel exiting and two entering the Gulf over 12 hours, versus a typical daily flow of about 130 ships.
Reuters, citing Citi, said that if disruptions last another month, losses could reach about 1.3 billion barrels, with prices nearing $110 in Q2 2026. Bloomberg reported that Kuwait declared force majeure on oil shipments due to the blockade, while Societe Generale estimated demand has already fallen about 3%.
The current standoff presents a classic binary event for oil markets, creating extreme volatility. We are balanced between a potential supply shock if talks fail and a relief rally if a deal is reached. This uncertainty makes simple directional bets through futures contracts exceptionally risky.
Given this environment, we should prioritize options strategies that can capitalize on a large price swing. Implied volatility in WTI options is likely at highs not seen since the market disruptions of early 2022, making buying options expensive but reflecting the significant perceived risk. A straddle or strangle, which involves buying both a call and a put option, is a pure play on this volatility, profiting from a sharp move in either direction.
For those leaning toward an escalation, buying June 2026 call options with strike prices between $95 and $100 offers a leveraged bet on prices breaking out. However, these must be viewed as high-risk wagers, as a sudden truce would make them worthless quickly. Using call spreads can help define the risk and reduce the upfront cost of such a trade.
The gravity of the situation is clear when we look at the numbers. The Strait of Hormuz handles roughly 20% of global oil consumption, equivalent to nearly 21 million barrels per day. A prolonged closure would remove this supply from the market, making the forecast of $110 oil a very real scenario and validating Kuwait’s force majeure declaration.
Conversely, a successful diplomatic outcome would cause the geopolitical risk premium to vanish, likely sending prices tumbling back toward the low $80s. Traders can hedge long exposure by purchasing put options, which would profit from a sudden price drop. The reported 3% fall in demand already shows that the market is beginning to buckle under the pressure of a potential supply crisis.
