A report by DBS Bank’s Group Research, led by Chief Economist Taimur Baig and Senior Economist Nathan Chow, explores how US actions in Iran could influence oil prices. They warn that oil might rise to USD 100 per barrel if the Iranian government faces serious threats from the US.
The report indicates that while existing sanctions may not significantly affect the oil market, military actions could trigger price increases. Geopolitical tensions could also disrupt the easing of global inflation, impacting oil price stability.
US Impact on Oil Prices
Concerns about a potential US attack on Iran are creating tension in the oil market. Even if immediate conflict is avoided, worries about the situation persist, suggesting ongoing fluctuations in oil prices.
Despite recent global inflation pressures easing, oil could complicate things. Brent crude is currently near $88, up from $82 just two weeks ago, as market participants react to the possibility of US intervention in Iran. The market is factoring in risks that weren’t present earlier this year.
A military response from Iran could drive oil prices to $100 a barrel or more, greatly disrupting global supply chains. The CBOE Crude Oil Volatility Index (OVX), a key measure of market anxiety, has jumped to 45.6, its highest in nearly a year. This indicates that traders expect price swings to become more likely.
Following a recent naval standoff near the Strait of Hormuz, a US attack on Iran now appears to be a matter of when, not if. This has added a significant fear premium to the market, making oil trading more volatile, with daily price changes over 3% now common.
Strategies for Traders
In this climate, traders should think about using long-dated call options to take advantage of possible price increases while limiting their risk. There’s been a notable rise in open interest for May and June contracts with strike prices of $100 and $110. This approach allows traders to benefit from a sharp price rise without enduring the extreme fluctuations that come with holding futures contracts.
Looking back at early 2022, we can see how quickly geopolitical events can change energy prices. For example, Brent crude soared over 30% in just weeks due to the conflict in Ukraine. A similar swift movement driven by headlines could very well happen now.
Even a last-minute decision to avoid attacks may not calm the oil markets soon. The current geopolitical risk is now firmly established, suggesting that volatility will likely remain high. Writing uncovered call options during this period could be a very risky strategy until signs of de-escalation emerge.
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