Since Israel initiated attacks on Iran late last week, there have been a number of significant movements in the U.S. and worldwide benchmark oil prices. However, one indication helps investors understand how concerned they are about the possible breadth of the fight.
As the Israel-Iran dispute grew more intense, President Donald Trump demanded Iran’s “unconditional surrender” on Tuesday. In addition to calling for the evacuation of Tehran, a city of about 10 million people, he also raised concerns about potential U.S. actions to increase its level of engagement in the fight.
“The market is pricing in a wide range of tail risks,” Rebecca Babin, a senior energy trader and managing director at CIBC Private Wealth in New York, told MarketWatch, referring to the CBOE Crude-oil ETF Volatility Index XX:OVX closing at its highest level in more than three years. “It’s a clear sign that traders are increasingly uneasy about how this might evolve – not just short-term supply disruptions, but broader regional instability.”
According to Dow Jones Market Data, the index saw a significant increase on Tuesday, closing at $71.56, up 26%, marking its highest close since March 2022. Over the last five trading days, the index, which is defined as an assessment of the projected 30-day volatility of crude oil as priced by the United States Oil Fund USO, increased by 104%.
Although not quite as much as this one, the index has experienced increases after significant occurrences. For instance, following the Hamas attack on Israel on Saturday, October 7, 2023, it increased 11.7% to close at $39.85 on Monday, the most since June of the same year. The index closed at $35.45, up 18% the day following Trump’s “liberation day” tariff announcements on April 2.
The circumstances surrounding Israel and Iran are “quite different this time,” according to Fawad Razaqzada, a market analyst at FOREX.com and City Index. Razaqzada claimed that the statement made by U.S. President Donald Trump on social media, “we now have complete and total control of the skies over Iran,” implies that the United States is “entering the fray.”
As worries over Tehran’s nuclear program grew, Israel attacked Iran for the first time late last week. Iran has since replied by firing long-range missiles at Israel.
In light of this, oil prices rose substantially on Friday, dropped on Monday, and then rose again on Tuesday. On the New York Mercantile Exchange, the benchmark U.S. West Texas Intermediate crude for July delivery (CLN25) (CL.1) added $3.07, or 4.3%, to close at $74.84 a barrel. This is the highest front-month contract finish since January of this year. The global benchmark, August Brent (BRN00) (BRNQ25), ended at $76.45 a barrel on ICE Futures Europe, up $3.22, or 4.4%, to reach its highest level since February.
Given that Iran sells over 1.5 million barrels of oil per day, Matt Polyak, managing partner at Hummingbird Capital, stated that the main cause of market volatility is the possible effect on world supplies.
The Energy Information Administration estimates that in 2024, the Strait of Hormuz, a vital oil chokepoint between Oman and Iran, handled an average of 20 million barrels of oil per day, or around 20% of the world’s consumption of petroleum liquids.
Read: The Strait of Hormuz is a source of concern in the Israel-Iran conflict. implications for inflation and oil prices.
According to Hummingbird’s Polyak, the Commodity Futures Trading Commission Nymex crude oil managed money net positioning is below the five-year average and in line with the most recent three-year average, indicating that there is still potential for more long holdings.
Denton Cinquegrana, the chief oil analyst at the Oil Price Information Service, which is a division of Dow Jones, the company that publishes MarketWatch, noted that open interest for the WTI contracts is in “free fall, so shorts are definitely getting covered.” An investor who bets on a decline in the price of oil is said to be “getting covered” if they repurchase the oil they sold short.
For instance, according to FactSet data, open interest for the front-month WTI oil futures contract decreased from 144,493 on Friday to about 81,660 on Tuesday.
If the issue stays restricted to tensions between Iran and Israel, Babin of CIBC stated that “some of the move may already be priced in – especially since spare capacity from Saudi [Arabia] and the UAE provides some buffer.” Babin also questioned how high oil prices could rise from here.
nevertheless, “if there are signs this is escalating into a regional conflict with direct hits on infrastructure, there is meaningful upside risk still to come” for the petroleum industry, she stated.
