Collapse In Oil Volatility As Hormuz Reopens
With the Strait of Hormuz reopening, we expect the significant volatility we saw in oil options to collapse in the coming days. The risk premium that was priced into near-term crude futures is evaporating now that tankers are moving again. This suggests that strategies profiting from a decrease in implied volatility, such as selling strangles, should be considered. This situation is reminiscent of past geopolitical scares, like the tanker attacks in mid-2019, where initial price spikes quickly faded once the immediate threat to supply chains was contained. Data from the Energy Information Administration (EIA) shows that about 21% of global petroleum liquids consumption moves through the strait, so its reopening removes the market’s biggest supply-side fear. We believe the price of Brent crude will struggle to stay above the $80 mark without a new catalyst.Shifting Focus To Macroeconomic Headwinds
Our attention is now shifting from geopolitics back to macroeconomic headwinds. A strong U.S. Dollar Index, which is currently holding above the 105 level, makes oil more expensive for holders of other currencies, typically dampening demand. Combined with hawkish commentary from the Federal Reserve, the path of least resistance for crude appears to be sideways or lower. Recent inflation figures, with the Consumer Price Index showing persistent underlying price pressures, support the view that interest rates will not be cut anytime soon. Higher rates can slow economic growth, which in turn reduces overall energy demand. Therefore, we are looking to position for a potential slide in WTI back toward the low $70s. For the next few weeks, we will be looking at selling out-of-the-money call spreads on crude oil futures. This approach allows us to collect premium while defining our risk, capitalizing on the market’s shift away from supply disruption fears. We must, however, remain vigilant, as any renewed escalation in the region would quickly invalidate this outlook.Start trading now — click here to create your real VT Markets account.
