J.P. Morgan warns that if tensions rise leading to the closure of the Strait of Hormuz, oil prices could soar to between $120 and $130 per barrel. Goldman Sachs notes a $10 per barrel increase in prices due to geopolitical risks. According to Barclays, if Iranian oil exports are cut in half, prices could reach $85, possibly surpassing $100 if a wider regional conflict arises.

Short-Term Fragility and Market Adjustments

The earlier sections illustrate a mix of short-term vulnerability and the oil market’s ability to adjust. Prices are being affected not only by fears of supply issues but also by expectations of potential disruptions, which are mostly speculative. The recent rise in Brent crude prices is linked more to perceived potential losses than to actual output decreases. The prospect of losing a few hundred thousand barrels is low compared to historical figures, but it matters because of the origin of that oil and the difficulty in finding replacements. It’s important to note that most of Iran’s output continues to flow, despite sanctions, through less visible means. Any change to this situation wouldn’t go unnoticed. Some analysts believe that exports may already be reducing due to pressure, which lowers the chances of a significant shock ahead. Others remain cautious, predicting further losses if tensions escalate. The actual impact will depend on how long the interruptions last. A short delay of a few weeks might raise prices temporarily while keeping the overall market stable. In contrast, a prolonged halt would completely change the situation. Additionally, physical barriers like blockages at the Strait of Hormuz typically do not last indefinitely. History shows that chokepoints can often be circumvented or reopened under pressure. Traders can take comfort in knowing that major producers generally respond to rising prices by drawing on reserves or increasing output. However, the speed of their response is crucial; any delay can create risks or opportunities based on market positioning.

The Role of Managed Money and Market Reactions

We believe that if disruptions last for months instead of weeks, the market will not wait for confirmation—it will react immediately. There’s little time for hesitation in such scenarios. Monitoring time spreads between nearby and deferred contracts can be helpful. Wider gaps signal increasing supply concerns and can become more volatile during geopolitical tensions. Under these conditions, price fluctuations become more constant rather than sporadic. It’s not only about price levels but also how resilient prices are when faced with varying news. Not all scenarios of disruption are priced similarly. Decreases in Iranian supply can have different effects depending on whether OPEC intervenes or if importers can quickly find other sources. Changes in demand from Asia, particularly China, can lessen the impact of supply cuts. However, this assumes there are no spillover effects from neighboring countries with higher production and transit activities. If risks spread geographically, the pricing implications also expand, which is why some estimates reach the $120–$130 range. A key factor today is how much of the current premium is connected to risk appetite. When expectations vary greatly, price movements reflect market positioning, not just fundamentals. Therefore, it’s important to pay attention not only to news headlines but also to how the markets react. If prices increase on known information, it suggests an imbalance in trading. Conversely, if prices drop despite new risks, it may indicate market fatigue. Eventually, optionality becomes crucial. Weekly option flows, changes in open interest, and the shape of the implied curve can hint at market fears and timelines. Past tensions have shown that certain expiration dates draw large trading volumes, either protecting or betting on specific disruption periods. This behavior often leads to significant intraday price shifts as hedges are established or dissolved rapidly. Don’t overlook the influence of managed money—positions held by funds frequently change ahead of clarity, as trading models trigger rebalancing or stop-losses get hit. These actions can create temporary market distortions that amplify price movements. Keeping a close eye on these flows helps anticipate moments when the market could move in one direction, especially on lighter trading days. In summary, while short-term oil pricing may not fully depend on actual lost volumes right now, the weeks ahead will hinge more on news interpretation, the timing of hedging actions, and changes in market positioning than on the amount of oil available. The market is alert and can overreact, and this may create opportunities. Create your live VT Markets account and start trading now.

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