Middle East Tensions Spike Crude — Here's Why (and How) I'm Getting Short

This trader outlines his contrarian approach to turmoil in the energy markets

• Geopolitical tensions, particularly between Iran and Israel, have added a fresh war premium to oil prices — but no actual supply disruption has occurred yet.
• US demand data paints a much more cautious picture, with gasoline inventories rising despite a drop in crude, hinting at weaker consumer behavior.
• OPEC+ remains noncommittal about additional supply cuts, leading to uncertainty and volatility in both the futures curve and options markets.
• I’m taking a short position via options: Selling the $94 strike calls on USO for the July 18 expiration, with plans to roll farther out for credit if necessary.
  

Crude oil’s recent surge has more to do with headlines than with actual barrels. Both WTI and Brent surged past $80 and $85, respectively, in early June, largely driven by growing fear of a broader conflict between Israel and Iran. While these two countries have had long-standing hostilities, what’s different this time is the increased threat of direct military escalation.

According to a Reuters report, more than 30% of global oil shipments pass through the Strait of Hormuz — and analysts at ING Bank say “a significant disruption could push oil prices toward the $120 mark.”

That may sound dramatic but it's not unfounded. The last time tensions were this high — during the 2022 Russia-Ukraine invasion — oil spiked to over $130 a barrel.

However, here’s the key point: No actual supply disruption has occurred. Iranian and Gulf state tankers are still flowing. Global inventory balances haven’t collapsed. The surge is built on fear, not fact — and that’s where trading opportunity lies.

What the inventory data is telling us

While oil bulls focus on the headlines, the Energy Information Administration (EIA) weekly inventory data tells a different story. In the latest report for the week ending May 30 crude oil inventories fell 4.3 million barrels, typically a bullish sign during driving season Gasoline inventories, however, rose 5.2 million barrels — a surprise to analysts expecting flat or declining gasoline stockpiles Distillates (like diesel) also increased, adding to the oversupply pressure

As CNBC wrote: “The market is struggling to reconcile falling crude with building gasoline, suggesting refiners may be overproducing relative to demand.”

And therein lies the issue: oil prices are rising based on geopolitical potential, but the real-time supply/demand data is flashing yellow lights on US consumption. This divergence makes the move ripe for a reversion or at least for options to be overpriced.

The OPEC+ wild card: Talk, no Action

OPEC+ has always been the third pillar of oil price dynamics. Right now, however, it’s not sending strong signals. While Saudi Arabia and Russia have voiced support for keeping voluntary cuts through 2024, no additional supply tightening has been formally announced.

That leaves the market vulnerable to a potential “buy the rumor, sell the fact” moment, especially if traders begin to suspect that OPEC’s bark is louder than its bite.

Add to that a strengthening US dollar and rising interest rate expectations, and you’ve got multiple headwinds stacked against sustained oil rallies.

The trade: Shorting $USO calls in July

The United States Oil Fund (USO) is a liquid, well-known oil exchange-traded fund (ETF) that tracks front-month WTI futures. It’s an excellent vehicle for expressing short-term views on crude without having to deal with the complexities of the futures market or direct exposure to leverage.

Currently, USO trades near $82 per share, and the $94 strike call expiring July 18 sits over 14% above spot, a level not seen since Q1 2022 when oil surged over $100.

Here’s how I’m trading it:

• Position: Sell the July 18 $94 Call
• Target Credit: $3.70 ish
• Plan if wrong: If USO rallies and this call approaches a 0.25 delta, I’ll look to roll to the August expiration, preferably collecting an additional net credit in the process

The real edge here isn’t just in the direction — it’s in the volatility premium. With implied volatility elevated because of the war premium, selling this call enables me to collect more extrinsic value than usual, especially on an option that’s far out of the money.

Why I like This Trade

Fear always leads to overreaction in options markets. When traders worry about a one-in-100 event (like the Strait of Hormuz shutting down), they bid up call options to protect against the upside, regardless of whether the event is likely.

My focus is to be selective with strikes , making make sure the premium compensates for the tail risk. But don’t hold blindly — be ready to adjust or roll. And be sure to understand the narrative: We're fading the pricing of fear, not the potential for chaos

The oil market is emotional right now — and emotional markets often create opportunity. By separating signal from noise, we can identify setups where the option market is mispricing risk.

I’ll be monitoring this position closely over the next few weeks. If volatility remains elevated, I may build a short call ladder or layer on more credit strategies around energy.

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Errol Coleman appears on the tastylive network shows Today’s Assignment and Trades on the Go.

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