Trump’s Twists and Turns Over Iran Leave Oil Traders Hanging

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Exiting Trades

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There are other clear examples of a market on edge. 

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Traders have been exiting futures positions at one of the fastest rates on record — an indication of both the stress that higher levels of volatility is placing on derivatives books, and the unpredictable path ahead. 

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In total, the number of futures contracts held on the main exchanges plunged by the equivalent of 367 million barrels, or about 7%, since the close on June. 12, the eve of Israel’s attack. Traders and brokers say the higher levels of volatility have made pricing deals harder over the past week. 

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“Traders and analysts should be viewing the current oil price gyrations in the context of speculative de-risking,” said Ryan Fitzmaurice, senior commodities strategist at Marex Group Plc. “Going forward, market volatility and open interest will be key areas to watch.”

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Much of the peril to the oil market is centered on the outlook for Hormuz, a vital conduit for not just Iranian shipments, but also for those of Saudi Arabia, Iraq, Kuwait and other members of the Organization of the Petroleum Exporting Countries. 

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The cost of hiring a ship to carry crude from the Middle East to China has jumped close to 90% since before Israeli attacks began. Earnings for vessels carrying fuels like gasoline and jet fuel have also leaped, as have insurance premiums.

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The danger to vessels in the waterway was underscored when two oil tankers crashed into each other in the region causing a fiery explosion — though on this occasion, the ship’s owner asserted there was no link to the conflict. 

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Still, almost 1,000 ships a day are having their GPS signals jammed, creating growing safety risks. The MICA Center, a French liaison between the military and commercial shipping, said the tanker crash was likely “aggravated” by jamming.

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“Next days will be critical in determining whether a diplomatic solution with Iran is possible and if the US might resort to military action,” it said in an update. “Maritime trade is not being targeted. The situation might change abruptly.”

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The risk to flows from the region, coupled with the sharp increase in shipping costs, is bolstering demand for crudes from outside of the Persian Gulf.  

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The most-immediate Brent futures closed at their strongest to the month after since September 2023 this week — a sign traders are willing to pay hefty premiums to get crude right now. Buyers of Middle Eastern supplies are clamoring for regional grades loading in the Gulf of Oman.

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It’s not just flows of crude that are at risk either. Diesel futures in Europe soared as high as $107.54 a barrel on Thursday as a combination of fear about supply and position covering propelled prices higher. 

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Diesel markets are particularly at risk of price spikes with stockpiles in some parts of the globe stubbornly low and refinery outages squeezing supply.

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Pullback Risk

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The higher different prices race, the greater the risk of a pullback if the prospect of de-escalation takes shape. 

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And even if tensions do remain high, there’s precedent from a few years ago for a meaningful supply disruption to quickly get resolved.

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When an attack in 2019 on processing facilities at Abqaiq in Saudi Arabia knocked out 7% of global supply, it took just a few weeks for crude futures to trade lower than before the attacks occurred, as supplies were quickly restored and backfilled.