Crude prices extended their upward bias on Wednesday as tensions in the Middle East raised the risk of a broader regional conflict. US benchmark West Texas Intermediate (WTI) reversed earlier declines to post fresh three-month highs at $92.70, and the market is again approaching the early-June peak of $94.87. The conflict involving Iran intensified on Tuesday, with the US and Iran exchanging attacks, while Iran-backed Houthi militias from Yemen struck oilfields in Saudi Arabia; Saudi forces then hit targets in Yemen in retaliation.
Shipping conditions have tightened after attacks on vessels in the Strait of Hormuz, a route that previously handled about 20% of global oil supply before the war, constraining traffic through the waterway. Rerouting is also emerging: the Suez Canal is seeing more transits as tankers seek to avoid Hormuz, while the Panama Canal has warned of deeper cuts as the El Niño drought threat builds. Against that backdrop, Goldman Sachs has flagged a scenario in which oil reaches $120 per barrel if disruption risks broaden and intensify.
Derivative Strategy Amid Rising Crude Prices
We recommend that derivative traders position for continued upward momentum as West Texas Intermediate (WTI) hovers near three-month highs of $92.70. With the early-June peak of $94.87 in immediate sight, a breakout could quickly trigger a run toward the $100 psychological threshold. Historical price action shows that when geopolitical tensions threaten Persian Gulf infrastructure, supply risk premiums can easily add $15 to $20 to the price of a barrel.
Given the escalating military strikes in the Middle East and the threat to the Strait of Hormuz, we expect implied volatility in crude options to spike significantly. Traders should consider buying out-of-the-money call options or bull call spreads to capitalize on the $120 target recently highlighted by industry experts without exposing themselves to unlimited downside. Historical data from past energy shocks shows that crude volatility can surge by over 50% in a matter of days, making long-volatility strategies highly attractive right now.
Futures Curve Dynamics and Market Risks
We also advise focusing on calendar spreads, as the physical tightness in the market is driving the futures curve into deep backwardation. Front-month contracts are trading at a premium to longer-dated futures because immediate delivery is highly prized amid shipping reroutes and canal bottlenecks. Buying the near-term contract and selling the longer-dated ones allows us to capture this positive roll yield as physical supplies remain constrained.
With nearly 20% of global oil supply normally flowing through the Strait of Hormuz now restricted, the impact on global energy transit cannot be overstated. Recent maritime data shows daily tanker traffic in the region has plummeted, while alternative routes like the Suez Canal face congestion and the Panama Canal grapples with severe drought restrictions. We must remain disciplined with tight stop-losses, as any sudden diplomatic breakthrough or strategic stock release could temporarily collapse this geopolitical premium.
