Short-Term Downside For Crude Prices
With the market now pricing in the return of Iranian oil, we believe the path of least resistance for crude prices is lower in the immediate term. The reopening of the Strait of Hormuz is a significant de-risking event, removing a major geopolitical premium that has been embedded in prices for years. Historically, the 2015 JCPOA deal saw oil prices fall by over 30% in the six months that followed as the market anticipated new supply. Given this outlook, we are looking at buying put options to profit from further downside over the next few weeks. The market’s sharp reaction suggests high implied volatility, so we are also exploring put spreads to lower the entry cost of these positions. The target is the low $70s, as a full return of Iranian barrels could add over 1 million barrels per day to global supply within months.Inventory Tightness And Longer-Term Bullish Factors
However, we cannot ignore the critically low U.S. inventory levels, which are now at their lowest in over four decades. This fundamental tightness is a coiled spring, made more significant by the U.S. Strategic Petroleum Reserve also sitting near 40-year lows of around 370 million barrels. The market is currently choosing to overlook this bullish fact in favor of the geopolitical news. This disconnect creates a compelling longer-term opportunity for when the focus shifts back to the physical market. We see value in purchasing out-of-the-money call options dated three to six months from now, which are currently cheap due to the drop in spot prices. If the implementation of the Iran deal faces delays or if demand remains robust, these positions could see substantial gains. Summer demand trends also support this underlying bullish case, as consumption typically rises during the peak driving season. Strong recent purchasing manager data from China and India suggests global demand remains resilient, which will continue to draw down these already-low stockpiles. This fundamental pressure will eventually have to be reconciled with the price.Start trading now — click here to create your real VT Markets account.
