Market and Volatility Impact of the Iran Agreement
We must anticipate a significant drop in crude oil prices. The reopening of the Strait of Hormuz by this Friday will immediately erase the geopolitical risk premium that has kept WTI futures trading near $95 a barrel. We should position for this by buying put options on oil ETFs like USO, as implied volatility is set to collapse. This de-escalation will crush overall market volatility. The CBOE Volatility Index (VIX), which has hovered around an elevated 22 for the past month, should fall sharply as a major source of global uncertainty is removed. We see an opportunity in shorting VIX futures or buying put spreads on volatility products. Lower energy costs provide a tailwind for the broader stock market. This acts as a tax cut for consumers and reduces input costs for businesses, especially in the transportation and industrial sectors. With core CPI inflation still sticky at 3.1%, this disinflationary shock could also give the Federal Reserve more reason to pause its tightening cycle.Sector Winners, Losers, and Historical Context
Conversely, we expect defense sector stocks to underperform significantly. Reduced tensions in the Middle East translate directly to a lower probability of future military contracts and foreign military sales. We are considering short positions or buying puts on major contractors like Raytheon and Lockheed Martin. We should not ignore the counterpoint regarding Russia’s oil waivers. The lapse of these waivers will remove approximately 3.4 million barrels per day of Russian seaborne crude from certain markets, providing a bullish floor for prices. This could create a profitable pairs trade, going long a Brent contract for a later date while shorting a front-month WTI contract. History supports a bearish outlook on oil following such an agreement. After the initial 2015 nuclear deal was announced, Brent crude prices fell by over 30% in the subsequent six months as the market priced in the eventual return of Iranian supply. We believe the path of least resistance for crude in the coming weeks is firmly down.Start trading now — click here to create your real VT Markets account.
