Bombs or a Deal? Crude Oil Traders Brace for Thursday's Iran Talks
Bombs or a Deal? Crude Oil Traders Brace for Thursday's Iran Talks
- A massive U.S. inventory build failed to eat into crude oil’s risk premium, highlighting the geopolitical pressure on prices.
- Traders await the next round of talks between the United States and Iran as fears of military conflict grow.
- Crude oil options volatility is elevated from geopolitical uncertainty, with call skew creating opportunity for options traders.
Geopolitical premium remains in oil despite massive U.S. stockpile buildup
Crude oil prices (/CLJ6) remain elevated despite a massive 16 million barrel build in U.S. stockpiles, according to the Energy Information Administration’s weekly inventory report, released Wednesday afternoon. That is the largest weekly build since February 2023. The fact that oil prices didn’t aggressively sell off on this news shows the strength of the risk premium priced into the product due to the situation unfolding between the United States and Iran.
Oil prices remain supported by geopolitical premium via tensions in the Middle East. Negotiations between Washington and Tehran continue to play out. The tension over a possible U.S. military intervention has been building for weeks and military forces are amassing in the Middle East, telegraphing a campaign that could last weeks and target Iran’s infrastructure, including energy.
Iran is the third largest producer in OPEC, pumping about 3.1 million barrels per day. That’s about 3% of global oil demand. In addition to Iran’s oil being taken off the market if the U.S. decides to strike the country, Iran could retaliate by forcing an effective closure of the Strait of Hormuz, where about 20% of the world’s oil supply passes.
The next round of negotiations will occur Thursday, and talks will focus on Tehran’s nuclear program. President Trump briefly mentioned Iran in the State of the Union address on Tuesday night, saying that the U.S. wants to hear “We will never have a nuclear weapon” from Iran.
Trump previously gave a deadline of about 15 days, which puts the timeline for possible military action around early March if a deal isn’t reached. If tomorrow’s talks generate positive headlines that show diplomacy is winning out, then crude oil prices may drift lower. But ultimately, the risk premium in the commodity won’t dissipate fully until a deal is reached.
Trading crude oil prices
Even if a deal isn’t reached and military action ensues, it doesn’t guarantee higher oil prices. Last June, crude oil initially rose in response to the strikes on Iranian nuclear sites, but prices quickly fell.
This time might be different. The buildup of U.S. forces in the Middle East is much larger and if military action is taken it would likely last days if not weeks or even months. There would also be the risk of the U.S. being dragged into a longer conflict. Iran could attempt to close the Strait of Hormuz and oil disruptions could cascade across the market.
For now, volatility is elevated. The implied volatility rank (IVR) stood at 72.5 as of Wednesday afternoon trading. That is moderately elevated, which makes sense given that we can expect bombs to possibly drop in a major oil-producing country.
There is massive call skew in crude oil options right now, with a nearly 17 point volatility spread between the 25-delta call and put options in the April 16 expiration.
That said, for range traders, you can employ an iron condor and push the call spread much farther out-of-the-money than the put side. This gives more room to work if the bombs do drop and you get a big upside move.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
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