Brent crude fell sharply last week as tanker traffic through the Strait of Hormuz increased, tempering concerns about an inflation shock and tighter monetary policy. Despite that retreat, the price was described as modestly higher on the day, with markets still watching Iran-related risks even as the US and Iran were reported to have agreed to pause further attacks ahead of technical talks in Doha this week.<\/p>\n\n
The latest bout of tension involved reciprocal strikes around Hormuz, including attacks on commercial shipping and responses targeting Iranian-linked and US-linked sites in the Gulf, with Bahrain and Kuwait cited. Maritime risk assessments were raised, with the Joint Maritime Information Center putting the threat level in the Strait at \u201csubstantial\u201d. In markets, an equity sell-off came even as Brent dropped 10.65% over the week and, after a 4.34% fall on Friday, moved back below pre-war levels to $71.99 a barrel, though disputes over provisions such as control and possible transit costs left the ceasefire framework fragile.<\/p>\n\n
We see Brent crude hovering near $74\/bbl, reflecting a tentative calm after last week’s sharp 10% drop. While the market has priced in de-escalation, the situation in the Strait of Hormuz remains exceptionally fragile. This disconnect between the current price and the underlying geopolitical risk is where we see the opportunity.<\/p>\n\n
Shipping data from Vortexa shows daily tanker transits through the Strait are now at 95% of their pre-conflict average, which is why spot prices have fallen. However, the oil volatility index (OVX) is still elevated at 38, suggesting the options market is pricing in a significant risk of a flare-up. This tells us that while crude oil itself is cheaper, insurance against a price spike is not.<\/p>\n\n
Given the binary risk from the Doha talks scheduled for this Wednesday, we are not taking a directional bet on price. We believe the best strategy is to buy volatility through options, such as a long straddle for August contracts. This position profits from a large price swing in either direction, whether talks succeed and prices fall further or fail and prices spike.<\/p>\n\n
This situation is reminiscent of the “Tanker War” in the 1980s, where sporadic attacks created prolonged periods of high volatility even when oil flows were not fully halted. We should anticipate that any negative headlines from the talks could cause an immediate gap up in price. Therefore, holding these volatility positions through the week seems prudent.<\/p>\n\n\n\n