Brent crude has swung with Iran conflict headlines as hopes of a deal to end the war pushed prices back below $100 a barrel. Brent ended last week at $103.54/bbl and traded at $97.87/bbl, a drop of 5.48% from Friday’s close, while earlier it touched $96.02 before reports that US and Israeli jets carried out new strikes in southern Iran on missile launch sites and mine-laying boats.
Over the week, Brent fell 5.24% to $103.54/bbl, while WTI slid 8.37% to $96.60/bbl. The move in crude coincided with easing stagflation fears and softer inflation expectations, as markets priced in a possible reopening of the Strait of Hormuz in the coming weeks, which supported bonds and equities on both sides of the Atlantic.
Brent Volatility Driven By Geopolitical Risk Premium
We have seen Brent crude fall sharply as diplomatic headlines suggest a potential deal in the Iran conflict could be near. This whipsaw action, taking prices from over $103 down below $98, is a clear sign that geopolitical risk premium is driving the market. The coming weeks will likely see this volatility continue as negotiations ebb and flow.
This bearish sentiment from peace talks, however, is being met with bullish fundamental data. The latest EIA report showed a surprise U.S. crude inventory draw of 2.1 million barrels last week, against expectations of a build, suggesting underlying demand remains robust. This fundamental tightness creates a floor for prices and a tense tug-of-war against the geopolitical headlines.
Trading Strategies Amid Uncertainty And Volatility
The options market is pricing in these sharp swings, with the CBOE Crude Oil Volatility Index (OVX) hovering around 42, well above its long-term average. This elevated implied volatility tells us that traders are braced for a significant price move. We believe this environment is less about picking a direction and more about positioning for the volatility itself.
Given this, we think traders should consider strategies that profit from large price movements, regardless of direction. Buying straddles or strangles on July contracts allows a position to benefit from a price spike if talks collapse or a price collapse if a deal is signed. This directly plays the high level of uncertainty priced into the market.
For those who want to express a directional view but with limited risk, we see merit in using vertical spreads. A bull call spread can capture upside from any renewed conflict, while a bear put spread can profit from a confirmed peace deal. These strategies offer a defined risk-reward profile, which is prudent when headlines can turn the market on a dime.
We are also paying close attention to the calendar, with diplomatic meetings reportedly scheduled for early June. This makes selling weekly options against longer-dated positions an attractive strategy to collect the high premium from near-term uncertainty. The goal is to let time decay work in our favor while waiting for a clearer picture to emerge.
