Escalating tensions between the US and Iran after an interim peace deal collapsed, alongside intensifying strikes between Ukraine and Russia, pushed energy markets higher over the past week, lifting crude, refined products, natural gas and European power. Brent climbed from $83\/bbl on 13 July to $88\/bbl, having briefly topped $90 overnight for its highest level since mid-June before easing. WTI rose from $78 to $82\/bbl over the same period, an increase of about 5%.<\/p>\n
The repricing was linked to shipping disruptions through Hormuz, a suspension at the CPC terminal and renewed concerns over supply availability as global stockpiles remain at record lows, with diesel markets signalling record tightness. The ICE gasoil crack spread widened to $65\/bbl and set a record high for three consecutive days last week, while the US 3-2-1 crack spread also reached a record high of $70\/bbl. India raised its diesel export levy to 15.5 rupees\/litre and its jet fuel export levy to 14.5 rupees\/litre, and US retail petrol moved back above $4\/gal.<\/p>\n
With Brent oil jumping to $88 and WTI touching $82 due to the Hormuz shipping crisis, we advise derivative traders to prepare for sustained upward volatility in the coming weeks. Rather than buying outright futures, we recommend using long call options on Brent to capture further upside while limiting downside risk in case of sudden de-escalations. Historically, sudden supply-side shocks of this scale lead to rapid implied volatility spikes, making premium-buying strategies highly lucrative if executed early.<\/p>\n
The record-breaking US 3-2-1 crack spread of $70 per barrel and ICE gasoil at $65 signal extreme tightness that we do not expect to ease soon. Traders should look at bull call spreads on heating oil and gasoil futures to capitalize on this refined product squeeze. This strategy mirrors the trading patterns of mid-2022 when refining capacity constraints pushed diesel cracks to historic highs, yielding massive returns for spread traders.<\/p>\n
Because global stockpiles are currently hovering near multi-year lows\u2014similar to the 2022 energy crisis when OECD commercial stocks fell more than 8% below the five-year average\u2014we expect the futures curve to remain deeply backwardated. We suggest trading front-month calendar spreads, specifically buying the prompt month and selling the second month, to capture the premium on immediate delivery. This backwardation play is highly supported by India’s decision to hike export levies to 15.5 rupees per liter, which will starve international markets of physical prompt supply.<\/p>\n
For institutional hedgers, we strongly recommend locking in pricing for diesel and jet fuel immediately before retail prices climb even further past the current $4 per gallon mark. Utilizing zero-cost collars can help protect against further geopolitical spikes while capping the maximum cost of fuel procurement. We must remain vigilant, as any sudden diplomatic breakthrough in the Middle East could quickly trigger a sharp 10% to 15% retracement in crude benchmarks.<\/p>\n\n\n\n