Brent’s front-month contract rose 12% over the week as escalating US-Iran tensions and Donald Trump’s comments lifted risk premia, with most of the move concentrated on Monday and Tuesday. Prices initially pushed towards $91/bbl after the headlines, before pulling back. Elsewhere, tanker tracking pointed to a crude-heavy recovery in Gulf shipping: crude oil was estimated to make up nearly 80% of Strait of Hormuz transit volumes, around five percentage points above pre-conflict levels, while LNG traffic was described as lagging.
Refining margins tightened faster than outright crude. Crack spreads climbed 22% in Asia and 12% in the US, in line with concerns over potential disruptions through the SoH and the prospect of product shortages. Inventory data added to the picture; reports indicated stocks increased by 21 million barrels in June, with the build judged to have occurred mainly in crude rather than refined products, leaving product balances comparatively tighter.
Options Strategies Amid Heightened Volatility
Given the sudden 12% surge in Brent crude this past week, we believe derivative traders should position for continued volatility. While Brent briefly touched $91 a barrel before pulling back, the geopolitical threats in the Middle East remain highly active. We recommend buying short-term Brent call options to capture sudden price spikes as US-Iran tensions escalate.
Exploiting Crack Spreads And Managing Supply Risk
We also see a highly profitable opportunity in trading crack spreads, which have jumped 22% in Asia and 12% in the US. Because refined product inventories are much tighter than crude oil, product cracks are poised to outperform. We suggest entering long positions on gasoline and heating oil crack spreads to exploit this widening gap.
Our analysis of transit data shows crude now accounts for 80% of Strait of Hormuz flows, concentrating supply risks in a single choke point. Historically, such bottlenecks combined with strict OPEC+ supply discipline lead to sudden market squeezes. With global oil demand hovering near record highs of 104 million barrels per day this summer, we advise using bull call spreads to limit risk.
Although global inventories grew by 21 million barrels last month, almost all of this build was in crude rather than refined products. We recommend avoiding short positions on the front-month contracts despite any temporary price dips. Instead, we should remain net-long on volatility to hedge against sudden shipping disruptions.
