Drivers of Market Strength and Risk Premiums
We see the current oil price strength as driven by both Middle East tensions and a fundamentally tight physical supply. The sharp drop in US crude inventories, confirmed again this week with a 5.8 million barrel draw, provides a strong floor under the market. This combination suggests price dips will likely be viewed as buying opportunities in the coming weeks. We believe the market is still factoring in the significant risk of a disruption in the Strait of Hormuz. Historically, sustained tensions in this critical waterway have added a $10-$15 risk premium to crude prices, a pattern seen during similar escalations in 2019. The ongoing military posturing means this premium is unlikely to fade quickly.Demand Outlook and Strategic Positioning
On top of the supply risks, we are entering the peak of the summer driving season with very strong demand signals. US gasoline demand surpassed 9.5 million barrels per day last week, a seasonal high that indicates robust consumption is here. This seasonal demand pressure will likely keep inventories drawing down through July. Given this outlook, we are positioning for continued price strength and heightened volatility. We see value in buying call options on WTI for August and September delivery, as this allows for capturing potential upside from any escalation while clearly defining risk. Reflecting the market’s nervousness, the CBOE Crude Oil Volatility Index (OVX) has already climbed to 42, so we feel it is prudent to establish these positions before premiums rise further.Start trading now — click here to create your real VT Markets account.
