WTI rebounded after three sessions of declines, trading near $88.80 a barrel in Asian hours on Monday and rising more than 2% as supply fears grew. The move followed Israel’s order for troops to push further into Lebanon, a fresh escalation involving the Iranian-backed Hezbollah group despite a ceasefire announced more than six weeks ago. The renewed fighting has weakened expectations that the US and Iran will soon agree to extend their wider ceasefire framework, and it came straight after Washington hosted Israeli-Lebanese peace talks on Friday, reviving concerns over regional stability and potential disruption to energy flows.
Uncertainty also persisted over a US-Iran arrangement that would prolong the ceasefire and reopen the Strait of Hormuz. Over the weekend, both sides exchanged proposals seeking changes to a draft deal, while a BBC report said President Donald Trump wants tougher terms covering Hormuz rules and the compulsory removal of highly enriched uranium. Iranian officials said contacts with Washington continued on Sunday, but only a clear outcome would allow an assessment, and parliament speaker Mohammad Bagher Ghalibaf set a condition that any agreement must explicitly secure the rights of the Iranian people.
Geopolitical Risk and Market Volatility
With WTI crude pushing toward $89.00, the primary signal for us is a sharp increase in expected market volatility. The Israeli advance into Lebanon introduces a significant geopolitical risk premium that the market had previously discounted. We see the CBOE Crude Oil Volatility Index (OVX) having already jumped to over 42, its highest point in months, indicating that options traders are bracing for substantial price swings in the near future.
Given the direct threat to regional stability, we are positioning for further upside potential by purchasing out-of-the-money call options. Specifically, we are looking at contracts with strike prices in the $95 to $100 range for July and August expiration, as this provides a cost-effective way to profit from a potential price spike. Any escalation that threatens the Strait of Hormuz, through which nearly 20% of the world’s total oil supply passes, would make these levels easily achievable.
Strategic Positioning, Hedging, and Market Fundamentals
We are also closely monitoring the futures curve, which has steepened into backwardation, where near-term contracts are more expensive than long-term ones. This structure signals acute concern over immediate supply availability, a pattern historically observed during major geopolitical flare-ups such as the initial phase of the Russia-Ukraine conflict in 2022. The widening spread between the front-month and six-month contracts suggests traders are willing to pay a hefty premium for immediate delivery.
While our bias is bullish, we are hedging against a sudden diplomatic breakthrough that could send prices tumbling. The ongoing, albeit fragile, dialogue between the US and Iran means a “risk-off” event is still possible. We are using bear put spreads to protect our positions, providing a buffer against a sharp reversal should tensions unexpectedly de-escalate.
The market’s ability to absorb a real supply shock is another key factor in our strategy. We note that OPEC+ spare production capacity is currently estimated to be under 3.5 million barrels per day, which is a historically thin cushion against major disruptions. This lack of a significant safety net means any actual loss of barrels from the region would translate directly into a severe and immediate price surge.
This week’s inventory data will be critical, so we are watching for the EIA report on Wednesday for signs of demand strength. Last week’s report showed a surprise drawdown of 4.2 million barrels, and a similar figure would add fundamental support to the current geopolitical rally. Conversely, a significant build in inventories could temporarily cap the price advance, offering a better entry point for new long positions.
