Oil prices rose on Monday morning as the Israel-Iran conflict entered its fourth day. Israel’s attack on Saturday targeted a gas processing facility linked to the South Pars field and damaged fuel storage tanks, causing an explosion and fire. Iran produces around 3.3 million barrels of crude oil daily, exporting 1.7 million of those. If Iran’s oil supply is disrupted, it could erase the surplus expected by late 2023. However, OPEC has a spare capacity of 5 million barrels per day that could quickly fill any market shortages.

Importance of the Strait of Hormuz

The ongoing conflict may disrupt shipping through the Strait of Hormuz, a crucial route for oil from the Persian Gulf. Nearly one-third of the world’s seaborne oil trade passes through this strait. Any blockages could sharply increase oil prices. Recent data shows that speculators increased their net long positions in ICE Brent by 29,159 lots, reaching a total of 196,922 lots by last Tuesday. This rise is mainly due to new positions being created and some short positions being closed. In the same period, NYMEX WTI saw an increase of 16,056 lots, bringing its total to 179,134. Last week’s figures indicate a boost in confidence among speculators regarding both ICE Brent and NYMEX WTI contracts, with net long positions rising significantly alongside rising tensions in the Middle East. The increase in open interest for both contracts, driven by new long positions and short covering, shows a clear intent to trade rather than just passive positioning. This trend suggests that traders are betting on potential supply risks to support prices in the near to medium term. The targeted attack on infrastructure linked to the South Pars field is very significant. This field is essential both regionally and globally, playing a critical role in natural gas production and condensate, which directly impacts crude markets. Disruptions to this field, already affecting facilities on the Iranian side, could also impact nearby production and logistics.

Potential Impacts on Oil Trade

Traders need to consider not only the direct oil flows but also possible transport issues. While the Strait of Hormuz is still operational, even unlikely scenarios of disruptions or delays must be taken into account when determining prices. It’s not just about lost barrels; it’s about the time and risk premiums added to each shipment. With almost a third of the oil trade passing through here, complacency regarding risks is not an option. Although OPEC’s spare capacity can offer some relief, it’s not an immediate solution. There is usually a delay between the announcement of increased output and the actual arrival of supplies in key markets. Traders need to be cautious about relying on this buffer, as it can quickly change with any shifts in policy. Currently, the rise in speculative long positions may continue, especially if technical conditions align with a bullish outlook. However, new traders are entering a less favorable market compared to two weeks ago. Increased volatility and short-term price fluctuations are influenced by both on-ground developments and changes in positioning data. Tracking freight rates in the Gulf region, especially for VLCCs, can provide additional insights into perceived risk. These rates are starting to strengthen, likely due to higher war risk insurance premiums and the potential for longer routes. A wise strategy now is to avoid assuming risk is only moving in one direction. Hedging against short exposure is sensible, but any long strategies should be flexible. The situation is fluid—any signs of de-escalation or moves toward dialogue could quickly reverse the current rally, which is largely powered by short covering. Additionally, broader economic factors, like inflation and interest rates, continue to influence the energy market. Observing the depth and spreads of the market, particularly between front-month and deferred contracts, will help to determine whether we are experiencing real supply tightness or just risk-driven buying. A softening of contango or a shift toward backwardation may indicate potential constraints or medium-term shortages. In this environment, careful and strategic positioning with attention to geopolitical factors and shipping routes will yield better outcomes than reacting to every headline. Create your live VT Markets account and start trading now.

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