Oil Supply Shock Intensifies
An Iranian missile hit an oil tanker in the Strait of Hormuz, causing a fire and forcing the crew to abandon the US-flagged ship. President Donald Trump offered insurance on Wednesday after ships lost cover following the Israel and US bombing campaign that began on Saturday. On the sixth day of the war, Qatar shut its LNG terminals and about 150 tankers were reported stuck in the Persian Gulf. The Strait of Hormuz carries 20% of global oil supply, and Iran said ships would not be allowed to exit while the war continues. Exxon Mobil shipped its first gasoline cargo to Australia on Thursday, while China banned petroleum exports and told Sinopec and PetroChina to halt gasoline and diesel exports. OPEC plans to raise output by over 200,000 barrels a day in April, after increasing by more than 400,000 barrels a day this month. WTI is up about 20% since the war began on 28 February. The US is considering requiring export licences for all AI-related products from Nvidia and AMD, and South Korea’s stock market is down 20% this week. The market’s initial drop is just the first reaction to a conflict that may last months, not weeks. With the Pentagon now planning for a war lasting until September, we must prepare for sustained uncertainty and price swings. We should be purchasing derivatives that profit from this volatility, such as options on the VIX, which has likely jumped from the mid-teens to near 30 in just the past week.Positioning For Prolonged Volatility
With the Strait of Hormuz closed to tanker traffic, oil prices will almost certainly continue to rise toward the $100 per barrel mark, a level that has historically signaled a coming recession. Looking back at the first Gulf War in 1990, we saw crude oil prices double in just a few months, tipping the S&P 500 into a 20% decline. The clearest trade is to be long oil through call options on WTI futures or energy ETFs. This sustained oil shock acts as a direct tax on consumers and corporations, making a broader stock market decline highly probable. We should be buying put options on the S&P 500 and Nasdaq indices to protect against this. Sectors that are highly sensitive to energy costs and consumer spending, like airlines and retail, are the most vulnerable and present clear shorting opportunities. The specific threat of export licenses for AI chips makes semiconductor stocks like Nvidia and AMD exceptionally weak. At the same time, we must recognize that energy producers are the clear winners in this environment. This sets up a classic pairs trade: buying call options on the energy sector ETF (XLE) while simultaneously buying puts on the semiconductor ETF (SMH). The 20% plunge in South Korea’s market this week should be seen as a leading indicator of how severe an energy crisis can be for industrial economies. The global nature of this supply shock means the contagion will likely spread. We must remain positioned for further downside and heightened volatility across all asset classes in the weeks ahead. Create your live VT Markets account and start trading now.
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