Supply Risks And Shipping Disruptions
Reuters reported Saudi Aramco cut crude shipments to Asian buyers for a second month in April, with disruption linked to flows through the Strait of Hormuz. Supply was limited to Arab Light crude from the Red Sea port of Yanbu, tightening feedstock for Asian refiners and limiting output. IEA chief Fatih Birol said he is speaking with governments about possible emergency stock releases. He said reopening the Strait of Hormuz is the main route to ease the situation, and warned the disruption could exceed the combined oil shocks of the 1970s. With West Texas Intermediate crude near $98 a barrel and a 48-hour US deadline for Iran, we are seeing a massive increase in implied volatility. Traders should consider buying call options on May and June futures with strike prices well above $100, such as $105 or $110. This gives exposure to a potential price surge if the Strait of Hormuz is closed, similar to how prices shot past $120 a barrel in early 2022 after the conflict in Ukraine began. The extreme uncertainty of the situation means prices could also collapse if a diplomatic solution is found. To profit from a large price swing in either direction, a long straddle is a viable strategy, involving the purchase of both a call and a put option. The CBOE Crude Oil Volatility Index (OVX) has likely surged, and we saw it jump from the 40s to over 90 during the 2022 supply shock, which shows how profitable playing volatility can be.Brent Wti Spread And Relative Value Trades
The disruption in the Strait of Hormuz affects the international Brent benchmark more directly than WTI, so we expect the Brent-WTI spread to widen significantly. A pair trade, going long Brent futures while shorting WTI futures, could capture this divergence. This is reinforced by reports that Asian refiners are already seeing supply cuts, which will impact their margins and product output. Given that Saudi Aramco is limiting shipments to Asia, the market for refined products like gasoline and diesel will tighten even faster than crude. We should look at buying futures for refined products like RBOB gasoline while selling WTI crude futures, a position known as a long crack spread. Last year, we saw Asian crack spreads nearly triple in a few weeks during the South China Sea naval exercises, highlighting the potential here. The warnings from the International Energy Agency about releasing emergency stocks suggest they see a real possibility of a crisis worse than the 1970s shocks. While an SPR release could eventually cap prices, the announcement itself confirms the severity of the supply threat we are facing. Looking back at the 1973 oil crisis, prices quadrupled within six months, a historical precedent that makes holding long positions a compelling strategy for the weeks ahead. Create your live VT Markets account and start trading now.
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