Oil options and futures are signalling that the latest Middle East conflict may be short‑lived, as traders pile into structures that profit from a retreat in prices after the initial spike.
Options and futures markets often provide the earliest signal of whether traders see a supply shock as fleeting or structural, creating opportunities to profit from sharp swings in prices.
The Israel‑U.S. attack on Iran has sent shockwaves through energy markets as war‑risk insurance costs surge, freight rates hit record levels and disruptions at the Strait of Hormuz snarl oil flows and strand hundreds of vessels. Oil prices on Friday were at multi-year highs.
In a sign traders see the price shock as temporary, 30-day at-the-money Brent implied volatility jumped 17.5 points to 68% over the past week through Tuesday, while 60- and 90-day tenors rose only 5.9 and 2.8 percentage points, LSEG data shows.
“What we’re watching in real time is the difference between a logistics crisis and a structural one,” Brian E. Kinsella, former Goldman Sachs energy specialist, told the Reuters Global Markets Forum.
“The market is betting it’s logistical and I think that is the right read,” he added.
The Brent futures curve is sending a similar signal.
The spread between the front-month Brent contract and the six-month contract widened to about $10, the steepest backwardation since the Russia-Ukraine war in 2022, pointing to tight near-term supply while suggesting short-term disruption.
Meanwhile, the put-to-call ratio on West Texas Intermediate options roughly halved to 0.35 on Monday from Friday’s close, CME data showed, pointing to heavy bullish call buying before rebounding to 0.56 on Tuesday as demand returned for downside protection.
A call option gives the holder the right, but not the obligation, to buy a crude futures contract at a set price, while a put option gives the right to sell one.
The ratio, meanwhile, compares bearish put options, which profit from declines, with bullish call options that benefit from rising prices to gauge market sentiment.
“Dealers are already short a meaningful amount of these deep out-of-the-money calls, creating a more negative gamma profile in crude,” said Rebecca Babin, senior energy trader at CIBC Private Wealth US. That contrasts with the more typical environment where dealers are long gamma and sell into rallies.
Gamma shows how much an option’s sensitivity to the futures price (delta) will change if the market moves.
Much of the 2027 Brent strip still trades below $70 a barrel, a sign markets are not yet pricing a structural shift in long-term supply, Babin said.
Producers have also used the rally to hedge forward output, creating natural selling pressure on longer-dated volatility, she added.
Risk premiums remain concentrated at the front of the futures curve, reinforcing the view that traders still see the disruption as temporary, said Darrell E. Fletcher, managing director of commodities at trading firm Bannockburn Capital Markets.
BRENT OPEN INTEREST SURGES
Brent options open interest plunged in late February before rebounding in early March, suggesting traders unwound positions before rebuilding hedges.
Front-month open interest fell from around 388,000 contracts on Feb. 18 to roughly 73,000 by Feb. 27, before surging to more than 700,000 contracts on March 2 as fresh positions were established.
“The open interest data seems like a pretty clear tell that it was a sharp unwind in positioning and not a structural repricing. The front end is clearly closing a trade while the back end is what to pay attention to,” Kinsella said.
Futures positioning shows a similar pattern, with more than 40% of open interest concentrated in April through July expiries and thinner positioning further out the curve, according to CME data.
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(Reporting by Mehnaz Yasmin and Utkarsh Shetti )
