Rising geopolitical tensions are pushing oil prices higher due to increased risk. Following Israel’s strike on Iran, uncertainty in the market has grown. Iran produces about 3.3 million barrels of oil daily and exports 1.7 million. If tensions escalate, these operations could be disrupted. The Strait of Hormuz may also face instability, which would further affect oil prices. Recent reports indicate explosions and air defense activities over Tehran, coinciding with ongoing Israeli operations. On Friday, June 13, rumors of an Israeli strike emerged, shortly before explosions in Tehran. Israel confirmed a preemptive attack, causing oil prices to rise and the Yen to strengthen. They claim to have targeted Iran’s main nuclear facility in Natanz. Unverified reports suggest Iranian air and missile activity, and the U.S. has warned Iran against attacking American interests. Meanwhile, Israel appears to have launched more strikes on Iran. U.S. President Trump called a National Security Council meeting on Friday, and Iran warned that both Israel and the U.S. would face serious consequences. We can see how increasing instability in the Middle East is affecting global markets. Oil prices are quickly adjusting to include supply risks. The overall atmosphere reflects heightened concern, driven by both confirmed and unconfirmed reports. To clarify the situation, Iran is a significant player in global oil exports. Any threat to its production, or to shipping routes like the Strait of Hormuz, impacts costs across many sectors reliant on steady energy supplies. These tensions have led to traders reassessing risks, considering not only direct supply disruptions but also possible sanctions, military escalation, and retaliation against commercial assets. We anticipate thinner liquidity and wider spreads in contracts related to energy as a result. From a broader perspective, it’s not just oil that’s reacting. Following the recent military developments, both the Yen and gold prices have risen. The Yen’s strength signifies a shift towards safe-haven assets during times of conflict and geopolitical uncertainty. Institutional investors are preparing for more volatility, which is reflected in changes in futures positions related to energy and metals. The slight strength of the dollar earlier in the week is beginning to reverse as markets react to the potential for wider military engagement. Currency responses in this context are revealing: assessing risk means reconsidering exposure to the region, including energy-dependent economies and countries with ties to both sides of the conflict. Some funds are already exiting riskier positions, and we’ve seen increased dollar-hedging activity in options data. Managed money positioning shows some reduction in bearish oil bets. Some traders are purchasing call spreads into late Q3, anticipating longer-term supply problems. This suggests a recalibration, indicating that volatility may persist rather than peak and then quickly fade. We don’t expect price stability in the short term. Even minor headlines could lead to significant intraday fluctuations. This is especially true if military assets are moved closer to shipping routes or energy infrastructure. At the same time, stock index volatility is relatively low by historical standards, suggesting traders might still be underestimating the potential impacts if energy prices remain unstable. In fixed income, yields have dipped slightly in line with risk aversion, but this trend may be short-lived. If tensions escalate, concerns about commodity-driven inflation could arise again. This risk is starting to reflect in option markets, where prices are adjusting for potential energy-related inflation reports. Given the current sensitivity to news, flexible risk management is crucial. Entering positions too early creates exposure to sudden changes or incorrect assumptions about events. We are ready to adjust our macro data assumptions based on new military developments. From a strategic perspective, curve trades in oil provide a clearer way to address near-term delivery risks. Volatility has been low for longer-term contracts, but this should adjust as the likelihood of persistent disruptions increases. Monitoring official responses is vital. The convening of the National Security Council indicates that state-level coordination may be underway. This often precedes broader military planning or joint actions, impacting the probability of supply interruptions. For those following the derivatives market, contract structures are particularly sensitive right now. Proxies for cross-commodity sentiment, like freight rates and refining margins, should be watched closely. Dislocations in these areas can lead to rapid repricing in derivatives, catching traders mid-transition. To stay ahead, quick responses and flexibility will be more important than long-term strategies. When physical supply is threatened, derivatives often react first—and they can move fast.

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