Brent rose to USD 82.37 overnight before falling back below USD 80 per barrel, as traders weighed the risk of disrupted oil supply in the Middle East. The move added a risk premium to prices. Bloomberg reported that tanker traffic through the Strait of Hormuz has largely halted, due to a self-imposed pause by shipowners and traders. Tankers have been piling up outside the waterway while firms seek clearer information on security.

Strait Of Hormuz Supply Risk

The Strait of Hormuz is a major chokepoint as about a fifth of the world’s oil and liquefied natural gas typically passes through each day. Ongoing disruption has increased concerns about global energy supplies. Oil prices are expected to keep a geopolitical risk premium for the foreseeable future. Further price pressure could affect macro conditions, with impacts most likely felt in Asia and Europe. We are seeing Brent crude oil showing high volatility, recently jumping over $82 before settling back under $80. This price action is a direct response to growing fears of a supply disruption in the Middle East. The market is now pricing in a geopolitical risk premium that we must factor into our strategies for the coming weeks. The primary cause is the near-total halt of tanker traffic through the Strait of Hormuz, a critical chokepoint for the global economy. Over 21 million barrels of oil, representing about a fifth of the world’s daily supply, normally pass through this waterway. The current pause by shipowners creates a major uncertainty for physical supply and is fueling speculative buying.

Options Strategies For Volatility

Given this heightened uncertainty, traders should consider buying options to capitalize on the rising volatility. Implied volatility on both Brent and WTI contracts is climbing, reflecting the market’s expectation of sharp price swings. Owning options allows for profiting from a large price move while defining and limiting downside risk. For those with a bullish outlook, buying call options or establishing bull call spreads offers a direct play on a potential price spike. This is a more capital-efficient strategy than holding long futures contracts, especially since a sudden de-escalation could erase the risk premium just as quickly as it appeared. We need to be prepared for prices to surge if the situation worsens. We only have to look back to the drone attacks on Saudi oil facilities in 2019 to see how fragile the supply chain is. That event caused Brent futures to surge nearly 20% in a single trading session. The current situation in the Strait of Hormuz has the potential for an even more dramatic impact on global prices. For any portfolios with exposure to energy costs, such as those in the transport or industrial sectors, this is a critical time to hedge. Buying futures or call options can protect against a sudden move towards $90 or even $100 per barrel. The cost of this insurance is likely far less than the potential loss from unhedged exposure. The macro consequences will be felt most acutely in Asia and Europe, which are heavily reliant on these shipments. We should watch for weakness in the economies of major importers like China, Japan, and India. This could present secondary trading opportunities in their currencies and equity markets as they grapple with higher energy costs. Create your live VT Markets account and start trading now.

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