Oil braces for even bigger risk premium as U.S. mulls Iran strikes

In an aerial view, the LyondellBasell Houston refinery is seen at sunset on June 18, 2025. Photo by Brandon Bell/Getty Images

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Oil watchers are re-evaluating the risk premium they should place on the global crude market, with the prospect of the U.S. joining Israel in bombing Iran looming.

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Brent futures have been pricing in a geopolitical premium of about US$8 a barrel since Israel and Iran began attacking each other last week, according to a survey of analysts and traders. U.S. intervention in the conflict would bolster that further, but exactly how much would depend on the nature of the involvement, the nine respondents said.

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Senior U.S. officials have been preparing for the possibility of a strike on Iran in the coming days, with some pointing to potential plans for a weekend strike. U.S. President Donald Trump has for days publicly mused about joining the attacks, a move that would escalate the conflict in a region that produces about a third of the world’s oil.

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Traders are glued to developments around the vital Straight of Hormuz, through which a fifth of the world’s crude shipments pass, and on Iran’s critical oil infrastructure — all of which are so far flowing normally. Data Wednesday suggested Iran has actually increased exports since attacks began.

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But further escalation could change that. Shell PLC chief executive officer Wael Sawan warned that a potential blockage of the key Persian Gulf chokepoint could deliver a substantial shock, and that the oil major has contingency plans for that.

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“We think the worst case is far from priced in,” Barclays analyst Amarpreet Singh said. “In the worst case scenario of a wider conflagration, we would expect prices to move past US$100 a barrel.”

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Options markets show how traders have begun to reflect that risk over recent days.

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Call options have been commanding the biggest premiums over bearish puts since at least 2013 — eclipsing a spike in 2022 when there were fears that the war in Ukraine would disrupt output in Russia, another of the world’s largest producers.

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Trading volumes for both futures and options have also soared to a record as investors try to hedge against the risk of prices surging further. Open interest data show a steady rise in strikes above US$90 a barrel since the start of last week.

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Still, there have also been some additions of put options in the US$60s as traders hedge for the rally to fade, given the lack of disruption so far.

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“One can easily position for a spike up in prices with U.S. intervention by buying out of the money calls,” said Harry Tchilinguirian, head of research at Onyx Capital Group.

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Traders can also do the opposite if they believe a spike will be short-lived, by selling calls and buying puts, he added, noting that carries higher risk given the uncertainty of where prices could go.

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Goldman Sachs Group Inc. said Thursday that it currently sees a risk premium of US$10 a barrel priced into the market and that high global spare capacity could buffer any price spike.

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“The term structure of implied volatility and call skew suggest that oil markets believe that much higher prices are likely in the next few months, but see limited changes to the long-term outlook,” analysts including Daan Struyven wrote.

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