Supply Disruptions Drive Producer Cuts
On Monday, crude prices rose after major Middle Eastern producers began cutting output due to disruptions linked to the strait. Tanker traffic was heavily restricted, and Saudi Arabia, the United Arab Emirates, Kuwait, and Iraq started curbing production as storage filled up. WTI later fell after reaching $113.28 in the prior session, the highest level since June 2022. Prices eased after Trump said he plans to waive oil-related sanctions and said the war with Iran could be resolved “very soon”. The International Energy Agency discussed a coordinated release of emergency oil reserves among member countries on Monday. The aim was to add temporary supply and limit price spikes. The extreme price swing from over $113 down to around $85.50 shows that volatility is the dominant factor right now. We are seeing implied volatility on crude options, as measured by the OVX index, spike to levels not experienced since the major supply shocks of 2022. This makes holding simple directional futures bets extremely risky in the immediate term.Options Strategies For Two Way Volatility
The fundamental bullish case remains the closure of the Strait of Hormuz, which disrupts nearly 21% of the world’s daily oil supply. As long as this key waterway is blocked and producers are forced to cut output, any significant price dips are likely to be met with strong buying pressure. This underlying tightness supports holding long positions through call options to limit downside risk. However, we must account for the significant headline risk that caused the recent sharp pullback from the highs. The talk of a coordinated Strategic Petroleum Reserve release by the IEA or a potential diplomatic resolution with Iran introduces major downside risk. We know US emergency reserves are already near 40-year lows, which could blunt the impact of any release, but the political statements alone are enough to trigger selling. Given these powerful opposing forces, we believe derivative strategies that profit from large price movements in either direction are the most sensible. Traders should consider buying options structures like straddles or strangles on WTI futures for the coming weeks. This allows a position to profit whether the price breaks back above $100 on escalating supply fears or falls below $75 on news of a diplomatic breakthrough. We remember how price action behaved during the supply disruptions of 2022. In that period, prices remained highly volatile and sensitive to every geopolitical headline for months. The current situation is even more acute because it involves a complete physical blockage of a critical transit point, suggesting this volatility is unlikely to fade soon. Create your live VT Markets account and start trading now.
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