The US and Iran have agreed to extend a ceasefire agreed in early April by 60 days, Nikkei reported, citing a source. Under the terms outlined, Iran would clear mines in the Strait of Hormuz within 30 days of an agreement, allowing ships of all countries to transit as they did before the closure, while ending the collection of transit fees. The framework also envisages a resumption of Iran’s nuclear talks during the two-month pause in hostilities.
US sanctions relief on Iranian assets is expected, although implementation would be phased. The agreement is expected to receive approval from Iran’s Supreme Leader, Ayatollah Mojtaba Khamenei. In markets, oil extended its decline: West Texas Intermediate slipped to a three-week low below $90.00 a barrel, down nearly 7% on the day.
Oil Markets And Geopolitical Risk Repricing
With West Texas Intermediate (WTI) crude oil breaking below $90, we see this not as a temporary dip but as a fundamental repricing of geopolitical risk. The reopening of the Strait of Hormuz, through which about 20% of global petroleum passes, removes a major supply bottleneck. We should position for oil prices to remain under pressure for the foreseeable future.
The potential return of Iranian oil to the market is the most significant factor for supply. Historically, Iran has shown it can increase production by over 1 million barrels per day within months of sanctions being eased, a scenario seen after the 2015 nuclear deal. This fresh supply will act as a ceiling on any significant crude oil price rallies in the coming quarter.
Derivatives Strategy And Equity Market Outlook
For our derivatives strategy, this points to a sharp decline in implied volatility. The CBOE Crude Oil Volatility Index (OVX), which was elevated due to the conflict, has likely collapsed below 30, and we anticipate it will fall further. We are selling call options on crude futures and oil-related ETFs to capitalize on both the falling price and the decrease in volatility.
This development is a significant tailwind for the broader equity market, acting as a tax cut for consumers and businesses. We are especially bullish on transportation sectors, with recent data showing airline fuel costs account for up to 30% of their operating expenses. We are buying call options on airline and shipping company stocks, as their margins are set to expand considerably.
Correspondingly, we expect the market’s main fear gauge, the VIX, to drift lower from its current levels. A resolution in the Middle East removes a major global uncertainty, which should calm equity markets. We are positioning for a low-volatility summer by selling out-of-the-money VIX calls expiring in July and August.
