Supply Shock And Market Volatility
The move in prices was compared with 2022, when Russia attacked Ukraine. During that period, the US sold strategic reserves to try to limit price rises. Similar use of US strategic reserves was referenced again, but it was noted that this would not replace all shutdown supply from the Middle East. The situation was described as unprecedented, with prices possibly rising further while the war continues. A potential resumption of shipments through the Strait of Hormuz was stated as the main factor that could reverse the price move. The article said it was created with the help of an Artificial Intelligence tool and reviewed by an editor. With Brent crude jumping 25% overnight to USD 116/bbl, we are now in a period of extreme volatility driven by a major supply shock. The halt of traffic through the Strait of Hormuz, a chokepoint for nearly 20 million barrels per day, has effectively removed a fifth of global supply from the market. This immediate and severe disruption requires traders to focus on managing rapidly changing risk. The sharp price increase means implied volatility on crude options has exploded, making the purchase of any contract very expensive. We are likely seeing the CBOE Crude Oil Volatility Index (OVX) surging past 80, levels not seen since the market panic at the start of the Ukraine war in 2022. This high cost of options must be factored into any new position, as it will quickly erode profits if the market moves sideways.Key Risks And Positioning
For those anticipating further escalation, buying call options on Brent or WTI futures offers a direct but costly way to profit from more upside. The price action is reminiscent of early 2022 when Brent briefly topped $130, a historical level that is now being considered a realistic near-term target. Given the uncertainty, using defined-risk call spreads may be a more prudent way to express a bullish view while managing the high premium costs. Conversely, the situation is fragile, and any news of de-escalation could trigger a violent price reversal. Traders should consider buying put options to hedge existing long exposure or to speculate on a sudden resolution. The elevated volatility means even out-of-the-money puts can provide significant protection against a sharp downturn for a relatively small capital outlay. The expected release from the US Strategic Petroleum Reserve will likely have a muted effect on prices this time around. We entered 2026 with reserve levels near 360 million barrels, substantially lower than the 560 million barrels held before the large-scale releases of 2022. This limited buffer leaves the market far more exposed to the current supply shutdown than it has been in the past. Looking back, we saw a period of relative calm in energy markets for much of 2025, which left many unprepared for this kind of geopolitical shock. The key market signal to watch will be any news regarding the resumption of shipments through the Strait of Hormuz. A confirmed restart of oil tanker traffic would almost certainly trigger a significant and rapid unwinding of the current war premium. Create your live VT Markets account and start trading now.
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