For now at least, most traders are viewing current events through the lens of recent history. (Ali Mohammadi/Bloomberg)
The past two years of escalating tensions in the Middle East have taught oil traders to be sanguine about the risk of disruption to oil supplies.
The barrage of headlines has revived memories of the political upheavals and price spikes of the 1970s — and yet even when oil prices have jumped, it inevitably proved short-lived. As Iran and Israel traded volleys of missiles in April last year and again in October, Middle Eastern oil continued to flow to the global market unaffected.
Now, the latest assault by Israel is putting oil traders’ nonchalance to the test. There’s been no impact on supplies so far, but the strikes have shaken a market that for most of this year has been overshadowed by worries about a looming surplus driving down prices, with OPEC+ quickly unwinding production cuts and output rising elsewhere from Brazil to Guyana, while President Donald Trump’s trade war threatens demand.
Even if many believe that the oil market may ultimately escape unscathed, the widespread uncertainty over how strongly Iran will respond, whether Israel will launch further attacks, and how the U.S. will react is forcing traders to price in a huge range of possible outcomes.
With hours left until the end of the trading week, few were brave enough to risk going into the weekend short. Brent futures spiked as much as 13% early on Friday and settled 7% higher at about $74 a barrel.
“When there’s a war on you’re not going to be short anything over the weekend,” said Andreas Laskaratos, chief executive officer of energy trading house AB Commodities. “Although the fundamentals haven’t changed you can’t trade against the headlines over the weekend.”
Traders and analysts began to game out scenarios for possible escalation or de-escalation almost as soon as the first Israeli missiles hit Iran in the early hours of June 13. Laskaratos says his Europe-based traders were at their desks by about 4:30 or 5:00 a.m.
(Bloomberg)
Analysts at Goldman Sachs Group Inc. raised their oil price forecasts for the coming months by $2-$3 a barrel, but laid out possible scenarios ranging from a surge in prices above $100 a barrel in the worst-case scenario, to a drop below $50 next year in their most bearish scenario.
“The potential of further escalation in the Middle East implies that the short-term risks to our price forecast are now skewed to the upside,” the analysts including Daan Struyven wrote. Still, they maintained their call for prices to drop below $60 by the fourth quarter of this year.
A surge of trading in out-of-the-money call options showed that many were seeking to hedge against the possibility of a price spike. Among the most traded options were call options that would pay out if prices rise above $85 a barrel by June 25; a measure of the price of WTI call options relative to the price of put options surged to the highest since March 2022, when the market was rocked by Russia’s full-scale invasion of Ukraine.
The most worrying possibility for the oil market is a disruption of shipping through the Strait of Hormuz, through which about one-fifth of global oil supply flows. Most analysts reckon that’s unlikely.
“It is our understanding that it would be extremely difficult for Iran to close the strait for an extended period given the presence of the U.S. Fifth Fleet in Bahrain,” said Helima Croft, head of global commodity strategy at RBC Capital Markets LLC, and a former CIA analyst.
Still, even if small, any increase in the chance of disruption is enough to drive prices.
“The possibility that the Strait of Hormuz closes is such a huge binary event, it makes forecasting balances challenging,” consultancy FGE NexantECA wrote in a report. “Most market participants we have spoken to are not expecting the Strait of Hormuz to be closed; the consequences are just too great.”
Other possible scenarios worrying oil traders include the possibility of strikes on Iran’s oil infrastructure — though Israel has so far avoided that — or the potential for sanctions against Iran to be ramped up if Tehran responds to the strikes by accelerating its nuclear program.
For now at least, most traders are viewing current events through the lens of recent history.
“For the past decade, events like this have been sell-the-rip situations. They didn’t escalate. Fears were worse than what actually happened,” Dan Pickering, chief investment officer at Pickering Energy Partners LP, an energy-focused investment bank in Houston, wrote on X.
The strikes may even turn out to be bearish. Trump on June 13 called on Iran to make a deal or face “even more brutal” attacks. If Tehran were to heed his advice, a nuclear deal would likely involve a relaxation of sanctions, potentially lifting Iran’s exports.
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FGE NexantECA said that market participants were “looking at the recent price action and starting to consider the events as a ‘sell’ opportunity.” “However, they acknowledge that taking a short position right now is hard given the risk/expectation of further escalation in tensions in the weeks ahead.”
Even if there is a disruption, OPEC+ members Saudi Arabia and the United Arab Emirates have significant spare capacity that could be brought on to potentially help cool prices.
“It would take a lot of courage for someone to go against it but that said we can’t see this rally being sustained in the long term,” said Laskaratos of AB Commodities. “We don’t believe the fundamentals have changed on supply and demand as things stand.”
