Escalation around the Strait of Hormuz and the Red Sea is being framed as a near-term upside risk for crude, with Brent referenced at USD 95.5 and benchmark crack spreads at USD 68. The scenario implies that any military deterioration could lift outright prices and stretch refining margins further, even as the duration of a move remains uncertain.
Separately, disruption risks are extending beyond the Middle East. Kazakhstan has been forced to halt oil shipments through the Black Sea following Ukrainian drone attacks, while the EU is preparing an Indian Ocean mission to board vessels linked to Russia’s shadow fleet. At the same time, Russian LNG is set to stay outside EU sanctions.
Short-Term Volatility and Trading Strategies Amid Geopolitical Risks
We expect sudden volatility in the energy markets over the coming weeks as tensions intensify in the Strait of Hormuz and the Red Sea. While Brent crude has been fluctuating around the $80 to $85 range recently, a sudden military escalation could easily push prices past the $95.5 mark. Derivative traders should prepare for this volatility by focusing on short-term upside options rather than long-term buy-and-hold strategies.
We advise looking closely at refining margins, as benchmark crack spreads could widen rapidly toward the high levels of $68 per barrel seen in previous geopolitical disruptions. Purchasing short-dated call options on distillates against crude futures offers a calculated way to capture these widening spreads. This strategy protects capital while positioning for the rapid price surges that accompany shipping bottlenecks.
Risk Management And The Prospect Of Price Reversion
We believe any massive price spike will be short-lived because neither the US, Iran, nor the Gulf states can afford the economic ruin of a prolonged, all-out war. History shows us that extreme geopolitical price spikes, such as the 2022 spike that pushed Brent close to $130, eventually revert as global supply routes adapt. Therefore, we should avoid getting trapped in long-term bullish positions and instead plan to trade the reversion once the initial panic peaks.
Global oil supply is already highly fragile, especially with Ukrainian drone strikes disrupting Black Sea pipelines and forcing Kazakhstan to halt key shipments. Furthermore, the European Union’s efforts to board Russian shadow fleet vessels in the Indian Ocean will likely tighten tanker availability and drive up freight insurance costs. We must monitor these secondary bottlenecks closely, as they will keep the floor under crude prices high even if Middle East tensions temporarily cool.
