Despite widespread Wall Street forecasts for oil prices to remain above $100 per barrel, coupled with declining inventories and a near-total blockade of the Strait of Hormuz, some traders are purchasing options to protect against the risk of a sudden de-escalation in tensions between the U.S. and Iran. Following the lack of substantial progress in U.S.-Iran negotiations, several banks, including Citigroup and Morgan Stanley, have raised their oil price forecasts to account for a prolonged closure of the Strait of Hormuz. Concurrently, Goldman Sachs estimates that global daily oil production will decrease by approximately 14.5 million barrels in April. However, bullish sentiment in the crude oil options market has fallen to its lowest level in two months, with significant put option spread activity observed this week—a strategy typically used to hedge against sell-off risks. Since the fragile ceasefire agreement was reached in mid-April, trading volume for Brent crude put options has exceeded that of call options, whereas earlier this year, trading was largely concentrated on bets for rising prices. Traders who matured in the market environment shaped by the Trump administration have learned not to ignore tail risks. Now, amid conflicting news, sharp price fluctuations are gradually giving way to a steady upward trend, and traders are no longer rushing to hedge against oil price increases. Rebecca Babin, Senior Energy Trader at CIBC Private Wealth Group, noted, "In recent trading sessions, put option activity has noticeably increased, with put spreads becoming a common tool for expressing a bearish outlook on crude. Market participants are beginning to look beyond current supply disruptions. As logistics in the Strait of Hormuz gradually normalize, their positioning is shifting toward a more balanced fundamental outlook." In recent years, the options market has been a primary tool for traders betting on escalating geopolitical uncertainty in the Middle East—a cycle that began with Hamas’s attack on Israel in October 2023. In late February, when the U.S. and Israel first launched strikes against Iran, call option premiums surged to record highs, and several volatility metrics reached levels not seen since the pandemic. The UAE’s unexpected decision to exit OPEC has also sparked market concerns that, once the conflict ends, additional supply could flood the market, and it may become more difficult for the producer group to maintain production discipline among its members. Mark Malek, Chief Investment Officer at Muriel Siebert & Co., stated that given the potential supply surge from the now "unrestricted" UAE and the possibility of significantly increased production across the Gulf region, traders’ demand to hedge against oil price declines is understandable. "When the Strait of Hormuz does reopen, the market will likely experience a substantial price reassessment—even though those hedging now may be paying a high cost," he added. According to Rystad Energy, the UAE has a production capacity of about 4.8 million barrels per day, with significant room for output increases. Experts suggest that while the short-term impact may be limited due to supply constraints from the conflict, the decision could lead to lower oil prices and heightened market volatility in the long run. Compiled data show that on Monday, Brent crude put option spreads covering at least 35 million barrels were traded, with expiration dates ranging from July to December. While the market’s focus earlier this year was largely on bets for rising prices, Brent crude put option volume has consistently exceeded call option volume since mid-April. It is worth noting that the level of bullish skew in the options market remains at a level only briefly seen during periods of extreme stress. Premiums for Brent crude call options extend even to contracts expiring a year from now—indicating that traders are not convinced the market will normalize soon. The emergence of these bearish bets contrasts sharply with the tightening conditions in the physical market, where actual crude oil is trading at a significant premium to futures prices. Countries facing supply shortages are turning to U.S. crude to fill the gap, driving U.S. crude and refined product exports to record highs. After both sides agreed to a ceasefire in early April, some tensions eased, and the truce has since been extended, even though shipping blockades by the U.S. and Iran have reduced daily traffic through the Strait of Hormuz to nearly zero. Some traders believe that neither side is willing to resume strikes, indicating a genuine intent to de-escalate the conflict. Babin of CIBC noted that this shift in the options market "suggests that traders believe the peak panic phase may have passed. Positioning is increasingly pointing toward an eventual diplomatic resolution—even as near-term inventory drawdowns and price spikes persist—and a return to a more balanced supply-demand outlook and lower price levels."
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