ING analysts said Brent rose after Middle East tensions, then ended the session higher but below intraday highs as markets rechecked the risk of supply disruption. They cited worries about oil moving through the Strait of Hormuz and the risk of attacks on energy assets in the region. They said price moves were modest given how much supply could be at risk and uncertainty over how long any disruption might last. They also said the market had already priced in a risk premium before the attacks and was pricing in a short-lived disruption that surplus supply expected this year could absorb.

Prompt Market Tightness Signals

They said the prompt market is tight, shown by wider Brent timespreads and stronger backwardation. The 12-month ICE Brent backwardation rose from less than US$5/bbl to a little over US$9.50/bbl, and the May/Jun spread moved towards a US$1.60/bbl backwardation. US Secretary of State Marco Rubio said the US will announce plans on Tuesday to limit higher energy costs. Reports also said the US has no immediate plan to release oil from the strategic petroleum reserve, while longer disruptions could raise the chance of coordinated emergency releases by several countries. Given the sharp rally from Middle East tensions, we are seeing immediate supply risks being priced into the market. The primary concern is the potential disruption of oil flows through the Strait of Hormuz, a chokepoint responsible for the transit of over 20 million barrels per day, roughly 20% of global consumption. Any actual disruption here would have a significant and immediate impact on physical supply. The most telling signal for traders is the extreme tightness in the prompt market. The 12-month Brent futures curve has blown out into a backwardation of over $9.50 per barrel, a level that signals intense demand for immediate delivery over future barrels. This structure heavily incentivizes drawing down inventories rather than storing oil.

Trading And Policy Watch

For derivatives traders, this steep backwardation makes long calendar spreads an attractive strategy. Buying a front-month contract, like May, and simultaneously selling a later-dated contract, like June or July, is a direct play on this market tightness. The May/Jun spread widening to $1.60/bbl shows this trade is already profitable for those who were positioned correctly. However, we must also consider the offsetting factors that have kept prices from spiraling higher. The market seems to be betting that any disruption will be short-lived, a sentiment we saw play out after similar geopolitical spikes in recent years. Back in 2025, we noted that OPEC+ maintained its production cuts, which has left very little spare capacity to easily absorb a shock like this. The elevated uncertainty should translate to higher implied volatility in the options market. While the direction of the next major price move is unclear, the risk of sharp swings in either direction is high, making strategies that profit from volatility decay, such as selling strangles, particularly risky. Traders with physical length should consider buying puts to protect against a sudden de-escalation. We must closely watch for government intervention, as Secretary of State Marco Rubio is set to announce plans to mitigate high energy costs. While reports suggest no immediate plan for a strategic petroleum reserve release, this remains the most potent tool to cap prices. However, with US reserves still rebuilding from the significant drawdowns we saw through 2025, the scale of any potential release may be more limited than in the past. Create your live VT Markets account and start trading now.

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