Yemen’s Iran-backed Houthi movement is weighing fees on commercial ships using the southern Red Sea, according to Reuters, following its declaration last week of a naval blockade on Saudi Arabia. Officials are said to be examining charges on most traffic through the Bab el-Mandeb strait, the gateway linking the southern Red Sea to the Gulf of Aden, although no implementation timetable was offered. The report cited goals of establishing a precedent for levies on international waterways and increasing pressure on the US.
Oil prices rose after the headlines, with West Texas Intermediate up 6.33% on the day at $83.32. WTI, or West Texas Intermediate, is a US-sourced benchmark crude traded via the Cushing hub. Price drivers include supply and demand, disruptions from political instability, wars and sanctions, and output policy set by OPEC, a 12-member producers’ group that meets twice a year; OPEC+ adds ten non-OPEC states. Weekly inventory figures from API and EIA can move prices: the reports often align, falling within 1% of each other 75% of the time.
Trading Strategy Amid Heightened Volatility
We advise derivative traders to quickly position themselves for a period of high volatility in the energy markets following the Houthi threats in the Red Sea. With WTI crude already jumping over 6% to $83.32, geopolitical risk is rapidly being priced back into oil. We should focus on buying short-term WTI call options to capture this sudden upward momentum.
Historically, the Bab el-Mandeb gateway controls around 12% of all seaborne-traded oil, totaling nearly 9 million barrels per day. Past disruptions in this narrow strait, such as those in late 2023 and early 2024, caused global shipping rates to spike by more than 150% almost overnight. We expect these new blockade threats to create similar supply bottlenecks, supporting higher oil prices in the coming weeks.
Navigating Market Opportunities Beyond Oil
To navigate the rising implied volatility, we suggest utilizing bull call spreads on WTI rather than buying outright options. We should also keep a close eye on the weekly EIA inventory data, which could trigger sharp price swings if domestic supplies show unexpected draws. Traders might also consider long Brent crude futures, as European markets are highly sensitive to disruptions along this specific trade route.
Beyond oil itself, we recommend looking at maritime shipping derivatives to hedge against soaring cargo costs. Buying call options on energy-sector ETFs is another smart way to gain exposure to this geopolitical friction. We must stay highly flexible, as any actual enforcement of these transit fees could easily push WTI toward the $90 threshold.
