ING’s Warren Patterson revised a base case for global energy markets and removed an earlier assumption of a two-week disruption in the Strait of Hormuz. The updated approach assumes disruption lasting into late March or longer, with gradual normalisation through the second and third quarters. The earlier base case assumed a full two-week stoppage, followed by recovery during March and near-normal flows by April. It has been revised because the conflict entered its third week with no resumption in energy flows.

Updated Base Case Assumptions

In scenario 1, the new base case, flows remain cut off until the end of March while intense combat continues until month-end. Lower-intensity strikes and more diplomatic activity then allow a gradual recovery in the second quarter. Upstream production, refineries and LNG facilities ramp up as storage constraints ease, and some oil continues to bypass Hormuz via available pipeline capacity. Near-normal flows return by the start of the third quarter. Scenario 2 is the most optimistic: flows remain almost fully disrupted until the end of March, then improve in April. Supply returns to near normal by May. Scenario 3 assumes fighting stays intense into April, then shifts to ongoing lower-level confrontation with limited diplomacy. Attacks on vessels keep energy flows disrupted for an extended period.

Market Volatility Outlook

Given that our initial assumption of a quick two-week disruption has failed, the market’s volatility will likely remain extremely elevated. With Brent crude futures already pushing past $125 per barrel, the CBOE Crude Oil Volatility Index (OVX) has surged to over 75, a level indicating significant market stress. Traders should prepare for this high-volatility environment to persist through the second quarter. The new base case, which sees disruptions lasting until the end of March with a slow recovery, suggests the front-end of the oil futures curve will remain in steep backwardation. This is where near-term delivery contracts trade at a significant premium to longer-dated ones, reflecting the acute, immediate shortage of supply from a strait that handles nearly 20% of global oil consumption. Positioning for this through calendar spreads could be a viable strategy. Buying call options with expirations in June and July now aligns with the updated view that a return to normal flows may not occur until the start of the third quarter. While high implied volatility makes these options expensive, it reflects the genuine risk of further price spikes if the conflict escalates toward the more aggressive scenario. The potential for a sharp move upwards outweighs the high premium costs for many. We learned from the market reaction to the supply shock in 2022 that initial price moves can be dramatic and sustained longer than first anticipated. Back then, front-month prices rallied over 30% in just a couple of weeks, catching many off guard. That historical precedent suggests that in the current situation, assuming a quick resolution is a low-probability, high-risk bet. Recent announcements of a coordinated 60-million-barrel release from strategic petroleum reserves (SPR) by IEA members may place a temporary ceiling on prices. However, this volume is small compared to the disruption and will not solve the underlying physical bottleneck at the Strait of Hormuz. Traders should view SPR releases as creating opportunities to enter long positions at slightly lower prices, not as a sign the crisis is over. If the most aggressive scenario materializes, with conflict continuing into April, the disruption would extend for a prolonged period. This would make even longer-dated call options, such as those for September or December delivery, increasingly attractive. Such a scenario would imply a structural shift in energy supply chains, keeping prices elevated for the remainder of the year. Create your live VT Markets account and start trading now.

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