Fighting in Iran and disruptions in the Strait of Hormuz have tightened the oil market, with attention turning to upcoming monthly reports from the IEA, EIA and OPEC. These reports are expected to focus on the stock situation.
Extended paralysis of shipping is expected to raise supply disruption risks because the region has limited rerouting and storage capacity. The IEA puts bypass capacity for crude oil via pipeline at 3.5 to 5.5 million barrels per day.
Interruptions to supply routes through the Strait of Hormuz have pushed up oil prices and widened price gaps across crude grades, products and delivery dates. At one point, the Brent–WTI spread widened to 9 USD per barrel.
Time spreads for crude oil and gasoil have also widened, meaning larger price differences along forward curves. The gap between the first two Brent forward contracts reached USD 4.5 per barrel.
Since the start of the Iran war, oil prices have risen by around 20%. The US government is considering measures intended to curb the rise.
We are treating the war in Iran as the dominant factor driving the energy markets. The immediate 20% jump in oil prices is a clear signal of a severe supply shock. The focus for us in the coming weeks is how long these disruptions will last and how inventories will respond.
The Strait of Hormuz, through which nearly 17 million barrels of oil pass daily, remains the critical chokepoint. This disruption disproportionately affects international crudes, which is why we saw the price of Brent blow out to a $9 premium over WTI. This geographical spread is a key trading opportunity, but we must watch for any signs of it narrowing as rerouting options are explored.
The extreme tightness in the physical market is creating a steep backwardation, with the front-month Brent contract trading $4.50 higher than the next one. This situation, reminiscent of the acute shortages seen back in 2022, signals a desperate scramble for prompt barrels. The upcoming inventory reports from the IEA and EIA will be vital, as a larger-than-expected draw could send this spread even higher.
The main risk to a continued price rally is intervention from the United States. We remember the massive 180-million-barrel release from the Strategic Petroleum Reserve in 2022, which shows they have powerful tools to cool the market. The threat of a similar action should make us cautious about maintaining excessively bullish positions.
Given the high uncertainty, derivative strategies should focus on this volatility and the widening spreads. Trading the Brent-WTI spread or using options to bet on time spreads may offer better risk-adjusted returns than simply betting on price direction. Using options to define risk will be crucial, especially ahead of key inventory reports or U.S. government announcements.
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