Oil prices remain tied to Middle East developments as disruptions to flows through the Strait of Hormuz persist, keeping prompt supply conditions tight. The market is also watching negotiations between the US and Iran, while the absence of a sustained restart in regional shipments leaves prices exposed to further upside into the third quarter, given that any recovery in flows is expected to be slow and gradual.
In the US, weekly EIA data showed commercial crude inventories fell by 7.97m barrels last week, taking the cumulative draw over the past month and a half to 32m barrels. Seasonal refinery runs typically reduce stocks, but the recent pace has been faster than usual; when releases from the strategic petroleum reserve are included, total crude inventories declined by 15.97m barrels over the week.
Upward Pressure From Strait Of Hormuz Disruptions And Inventory Draws
We see oil prices facing significant upward pressure due to ongoing disruptions in the Strait of Hormuz. Recent reports from the UK Maritime Trade Operations (UKMTO) have confirmed continued threats to tanker traffic, casting serious doubt on any quick resumption of normal energy flows. This geopolitical uncertainty is tightening the supply side of the market.
The latest Energy Information Administration (EIA) data reinforces this bullish view, showing a U.S. crude inventory draw of 8.2 million barrels. This is nearly double the five-year average draw for the first week of June, indicating that demand is outpacing supply more rapidly than usual. When combined with strategic reserve releases, the total inventory decline is even more pronounced, shrinking the overall cushion for any supply shock.
Positioning For A Potential Price Spike Amid Increased Market Volatility
Given these factors, we believe traders should position for higher prices heading into the third quarter. Buying call options for August and September delivery on Brent crude, particularly strikes around the $100 to $105 level, offers a direct way to profit from a potential price spike. The market is getting tighter, and any escalation in the Middle East could send prices sharply higher.
Volatility is also increasing, with the CBOE Crude Oil Volatility Index (OVX) climbing to 38, making options more expensive. To manage these higher costs, traders could use bull call spreads, which would cap potential gains but significantly lower the initial premium paid. This strategy allows for participation in the upside while defining risk in an uncertain environment.
This situation is reminiscent of the supply shock in late 2019, when an attack on Saudi facilities caused a rapid price surge. A similar event today, in an already tighter market, could have an even more dramatic effect. Any deal to restore stability will likely result in a slow and gradual recovery of oil flows, meaning inventories will continue to draw down through the summer.
