Oil prices rebounded after reports that a commercial vessel was struck in the Strait of Hormuz, prompting ICE Brent to reverse earlier losses and settle more than 2% higher. Even so, downside momentum has persisted as attention shifted back to the resumption of crude flows through the chokepoint. The recovery in traffic has been driven in part by previously stranded vessels departing the Persian Gulf, which suggests flows could ease once that backlog clears.
The latest incident risks slowing shipping movements further, and the International Maritime Organisation has suspended its evacuation plan for stranded ships. Separately, OPEC faces fresh internal strain after the UAE’s recent exit, while Iraq’s oil ministry is pressing for a higher production quota and has said it could reconsider membership if it does not secure an increase. Iraq, the group’s second-largest producer, has production capacity of almost 4.7m b/d, and a more acute dispute would reinforce expectations of surplus conditions in 2027.
Geopolitical Risks Challenge Oil Market Momentum
We see the market’s downward momentum being challenged by new geopolitical risks in the Persian Gulf. ICE Brent futures for August delivery jumped over 2% yesterday to around $78.50 per barrel after the vessel strike, but the broader trend has been bearish. This creates a tense environment where fundamentals are fighting against headline risk.
The primary pressure on prices comes from recovering oil flows through the Strait of Hormuz, which according to maritime analytics have now climbed back to nearly 17.1 million barrels per day. This supply recovery, combined with Iraq’s demands for a higher OPEC quota, is feeding a narrative of a well-supplied market into next year. However, we note that much of this flow is a backlog of previously stranded ships, which could mean a pullback in transit numbers is imminent.
Volatility Strategies Amid Uncertainty
Given this conflict between recovering supply and sudden geopolitical flares, we believe positioning for increased price volatility is the most prudent strategy. The CBOE Crude Oil Volatility Index (OVX) has already climbed over 15% this week to 34.5, signaling that the market is pricing in larger price swings. Therefore, outright directional bets on price seem excessively risky in the immediate term.
We are looking at buying options contracts for the coming weeks to capitalize on this uncertainty with limited risk. A long straddle, which involves purchasing both a call and a put option with the same strike price, could be effective in profiting from a significant price move in either direction. This strategy allows us to benefit from a sharp spike or a renewed downturn.
We must not forget how quickly the market can turn, as it did during the 2019 drone attacks on Saudi facilities which sent Brent prices soaring almost 20% in a single session. Any escalation in the Persian Gulf or a breakdown in OPEC cohesion could trigger a similar event. For this reason, holding short positions without protection from options seems unwise right now.
