WTI, the US crude benchmark, began Asian trade on Monday with a bullish gap of more than $1, retesting $78 and rising by nearly 2% in early dealing. Later it was up 1.15%, holding above $77, as supply risks returned after Iran again closed the Strait of Hormuz on Saturday following renewed hostilities involving Israel and Lebanon. US President Donald Trump said the US would strike Tehran “harder” after the closure, and also addressed the Iran-backed group Hezbollah in Lebanon, while Iranian negotiators then walked out of US talks in Switzerland.
Last week Iran and the US signed a memorandum of understanding aimed at lifting the Hormuz blockade, setting up 60 days of talks on Iran’s civil nuclear programme. In oil-market terms, WTI is a light, sweet crude sourced in the US and distributed via Cushing, and its price is driven by supply and demand, geopolitical disruption, sanctions, OPEC decisions and the US Dollar. Weekly inventory data from API on Tuesdays and EIA the following day can move prices; results are usually similar, within 1% of each other 75% of the time, with EIA seen as more reliable. OPEC has 12 members that set quotas at twice-yearly meetings, while OPEC+ adds ten non-OPEC states, including Russia.
Supply Disruption Concerns and Volatility
We are seeing WTI prices jump on the renewed closure of the Strait of Hormuz, a critical chokepoint for global energy. Around 21 million barrels of oil, representing over a fifth of the world’s daily supply, transit this waterway. The market is right to be concerned about a significant supply disruption.
Given the escalating rhetoric between the US and Iran, we expect implied volatility in crude options to surge in the coming weeks. This makes strategies that profit from price swings, such as long straddles or strangles, potentially attractive for capturing this instability. The breakdown of peace talks suggests this tension will not resolve quickly.
Options Positioning and Strategic Outlook
We believe the path of least resistance for WTI is higher, with a test of the $80 level looking imminent. Historical precedent from similar Middle East flare-ups, like the 2019 tanker attacks which caused a 15% price spike in a single day, shows that prices react sharply to threats in this region. With US commercial crude inventories already trending below the five-year average according to recent EIA data, any real supply cut will be felt immediately.
Our focus should be on near-term call options, specifically looking at the August and September contracts to allow time for this situation to play out. Buying calls or bull call spreads provides leveraged exposure to the upside while defining our maximum risk to the premium paid. This is a prudent way to position for a potential supply shock without the unlimited risk of a long futures contract.
