Brent crude was trading at 98.1 USD/bbl after US strikes on Iranian missile launch sites and mine-laying boats in southern Iran, described by US officials as self-defence. The move left prices below Friday’s 103.5 close, with Brent holding around USD 98/bbl through yesterday following an initial drop. The latest action added strain to the ceasefire agreed in April, while the Strait of Hormuz remained central to the market’s focus.
Diplomatic uncertainty persisted. A Reuters outline described a three-stage framework: a formal end to the war, the reopening of the Strait of Hormuz, and an extendable 30-day window for wider talks covering nuclear issues and sanctions relief. Efforts to finalise details ran into Monday, including Iran’s foreign minister Araghchi travelling to Doha for talks with Qatar’s prime minister. Early Tuesday, Secretary of State Rubio indicated negotiations could take a few days and said the Strait of Hormuz would be opened “one way or the other”.
Market Uncertainty Driven by Diplomacy and Military Tension
We see Brent crude trading near $98 a barrel, caught between conflicting signals from the United States and Iran. While a potential peace deal is on the table, overnight US military strikes have put the fragile ceasefire under pressure. This creates an environment of significant uncertainty for the oil market.
This tension between diplomatic hopes and military action is causing extreme nervousness. We note that implied volatility on Brent options has surged in the past week, with the CBOE Crude Oil Volatility Index (OVX) climbing to 42, its highest level since March. This suggests the market is bracing for a sharp price move in the near future.
Potential Price Outcomes and Volatility Strategies
Any further escalation threatening the Strait of Hormuz could trigger a rapid price spike, making near-term call options attractive. Historically, similar threats to this critical waterway, through which about 20% of global oil consumption passes, have added a $10-$15 premium to prices almost overnight. We saw prices jump over 14% in a single day following the attacks on Saudi facilities in 2019.
On the other hand, a confirmed deal and the secure reopening of the strait would cause the current war risk premium to evaporate. We estimate this premium is currently holding prices up by at least $12, meaning a successful agreement could quickly send Brent back towards the mid-$80s. In this scenario, holding put options would be a valuable hedge against a sudden price collapse.
Given that the direction is so uncertain, we believe strategies that benefit from volatility itself are best. Traders could consider a long straddle, which involves buying both a call and a put option with the same strike price and expiration date. This position becomes profitable if the price of Brent crude makes a large move in either direction before the options expire.
These geopolitical risks are layered on top of an already tight physical market. The latest report from the Energy Information Administration showed US crude inventories fell by 2.5 million barrels last week, more than analysts expected. With global demand forecasts for the summer remaining robust, any actual supply disruption would have a powerful impact on prices.
