WTI crude regained some ground after opening with a bearish gap, yet it remained nearly 7% lower on the session, trading around $79.30 a barrel in Asian hours on Monday. The move followed a late Saturday Truth Social post from US President Donald Trump saying Iran and other Middle Eastern nations had asked for more time to finalise an agreement; the post said the deal would immediately reopen the strait and remove Iran’s nuclear threat.
Shipping updates on Monday showed mixed conditions: two tankers carrying Saudi oil transited the Bab el-Mandeb Strait out of the Red Sea over the weekend, while flows through the Strait of Hormuz slowed sharply after reported vessel strikes. The United Kingdom Maritime Trade Operations confirmed three further tanker attacks since Saturday. Separately, major OPEC+ producers approved a modest increase in production quotas, completing the planned unwinding of supply cuts introduced in 2023 and leaving scope for additional output increases once the Middle East conflict is resolved.
Market Dislocation Versus Physical Supply Risks
We see a glaring disconnect between the recent 7% drop in WTI crude to $79.30 and the escalating physical dangers in the Middle East. While optimistic social media reports have temporarily cooled the market, actual shipping data and missile strikes point to immediate supply disruptions. We recommend that derivative traders exploit this artificial dip by purchasing WTI call options, anticipating a sharp price rebound in the coming weeks.
Volatility, Shipping Chokepoints, And Trading Strategies
Geopolitical shocks historically trigger massive spikes in oil volatility, much like during the 2019 Saudi refinery attacks and the 2024 Red Sea escalations when oil implied volatility regularly jumped past 40%. With vital shipping lanes currently threatened by active drone and missile strikes, option premiums are likely underpricing the true risk of a sudden supply squeeze. We suggest deploying long straddles to profit from these inevitable price swings, regardless of which way the market moves.
While OPEC+ plans to restore its 2023 production cuts, these extra barrels cannot easily bypass chokepoints like the Strait of Hormuz, which historically handles over 20 million barrels of oil per day, or roughly 20% of global consumption. This physical bottleneck means any added supply will likely remain stranded, supporting a strong bullish case for near-term futures. We advise maintaining a net-long exposure through call spreads to limit downside risk while capturing the massive upside potential of this escalating regional conflict.
