Brent and WTI jumped by more than 20% to USD 120 per barrel at the Monday open, the highest level since June 2022. Prices then gave up most of those gains later the same day. The Iran conflict and the risk of a Strait of Hormuz blockade are presented as the main drivers for near-term supply concerns. A prolonged closure is described as hard to offset with other measures.

Near Term Supply Risks

Strategic reserve releases are described as a way to cover a shortfall until shipping through the Strait of Hormuz can resume. The G7 finance ministers decided against an immediate release during their latest consultations. US shale output could expand because higher prices improve drilling economics. Any increase is tied to expectations that prices stay high for several months, but prices are described as likely to fall quickly if Hormuz flows restart. Large OECD stockpiles and potential reserve releases are framed as temporary buffers rather than replacements for Gulf supply. The focus is placed on restoring safe navigation through the Strait of Hormuz as soon as possible. We have seen extreme volatility in oil prices this week, with Brent spiking above $120 before falling back. This rollercoaster ride is tied directly to the conflict in Iran and the risk of a blockade in the Strait of Hormuz. For traders, this signals that options strategies designed to profit from large price swings, regardless of direction, should be considered.

Options Strategies For Volatility

A prolonged closure of the Strait would be a severe shock to the market, as this chokepoint handles nearly 21 million barrels per day, which is about 20% of global oil consumption. In this scenario, crude prices could move substantially higher than the peak we saw at the start of the week. Therefore, positioning with long call options on WTI and Brent futures is a clear strategy to capitalize on a potential escalation. The possibility of the G7 releasing strategic reserves to dampen prices is being discussed, but we should be skeptical of its long-term impact. After significant drawdowns four years ago in 2022, the U.S. Strategic Petroleum Reserve is near its lowest level in 40 years, holding only around 360 million barrels. This limited buffer means any release would be a short-term solution and likely less effective than past interventions. We also see little hope for a quick supply response from U.S. shale producers. It typically takes six to nine months for new drilling to translate into meaningful production, and companies will not commit to major spending with prices reversing so quickly. Producers need a guarantee of sustained high prices for several months, which is far from certain. The entire situation hinges on whether the Strait of Hormuz remains open for transport. Given the binary nature of this outcome, a sudden diplomatic breakthrough could cause the war risk premium to evaporate and prices to plummet. Consequently, holding protective put options is essential to hedge against a rapid price collapse if the transport route is secured. Create your live VT Markets account and start trading now.

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