Geopolitical situation is delicate, oil prices have risen for three consecutive weeks.
Geopolitical risk premiums have returned to the energy market, with crude oil prices recording the longest streak of weekly gains since June last year.
According to Global Times, unrest in Iran has persisted for several days, and Iran’s Supreme National Security Council has accused the United States and Israel of orchestrating the turmoil. Iran’s Supreme Leader Khamenei said that rioters are trying to please another country’s president by destroying public property.
U.S. President Trump warned that if Iran is directly responsible for deaths during these events, “they will pay a heavy price.” He also stated that if there are further deaths, the United States will “strike Iran severely.”
The market’s focus has shifted from Venezuela to Iran. Previously, oil prices briefly retreated after Trump announced the cancellation of further action against Venezuela, but as Iran is a larger oil producer and exporter, the impact of its potential supply disruption far exceeds that of Venezuela.
On Friday, WTI crude oil futures prices surged more than 3% at one point. Although the gains eased towards the end of the session, prices were up over 5% in the past two trading days and rose for three consecutive weeks, marking the longest weekly rally since June last year.
(WTI crude oil futures performed strongly this week)
Additionally, the options market reflects the shift in risk appetite. The skewness of call options has reached the highest level for U.S. crude oil futures since July, with traders paying the highest insurance premiums since last summer’s Israel-Iran clashes to hedge against a potential price surge.
Despite higher prices, fundamental pressures remain. Goldman Sachs notes that its clients’ bearishness on oil prices is the highest in a decade. However, it is precisely this extreme bearish sentiment combined with sudden geopolitical risks that may force short positions to be unwound, thereby triggering a sharp market reversal.
Shift in Geopolitical Risk Focus
According to CCTV News, on January 9 local time, U.S. President Trump held a meeting at the White House with the executives of some of the world’s largest oil companies.
Trump said that major oil companies will spend at least $100 billion to rebuild the necessary capacity and infrastructure of Venezuela’s oil industry. He also promised that U.S. oil companies would receive security guarantees.
According to reports, Venezuelan interim president Delcy Rodríguez, while accusing the United States of “illegal aggression,” also expressed a desire to seek diplomatic solutions and “shared interests.”
The easing of the Venezuelan situation has made the market pay more attention to supply risks from Iran. According to Trafigura’s global head of oil, who spoke to Bloomberg TV, the current “bullish uncertainty factor” in the oil market is Iran, not Venezuela.
Due to U.S. sanctions and outdated infrastructure, Venezuela’s role as a supplier has shrunk sharply in recent years. Iran not only produces over 3 million barrels of crude oil per day, but its exports in October and November also remained at around 2 million barrels per day.
Rapidan Energy Group currently believes that if there are large civilian casualties in Iran, there is a 70% chance the United States will intervene, possibly through tighter economic restrictions or cyber warfare.
Arne Lohmann Rasmussen, Chief Analyst at A/S, noted that the market is increasingly worried that the United States might exploit the chaos to attempt to overthrow the Iranian regime.
Short Covering and Fund Flows
Analysts believe the amplification of Iran’s risk is mainly because oil traders have previously held a large amount of bearish bets.
If geopolitical tensions force these positions to be unwound, the market may face a drastic reversal. Fund flow data shows that bullish momentum is building up.
According to James Taylor, Head of Quantitative Services at Energy Aspects, trend-following commodity trading advisors (CTA) were buying crude oil on Thursday, and if prices stabilize, they will continue buying in the coming days.
Meanwhile, bullish capital flows are surging in the options market. This week, Brent crude call option trading volumes exceeded 750,000 contracts, the highest since October, including a large volume of $80 strike call options, which market participants view as hedges against price spikes.
In addition, RBC estimates that more than $6 billion will flow into the market in the coming days due to annual rebalancing, mainly from commodity index funds. James Taylor points out that capital from CTA, index flows, and options traders is creating financial momentum.
Inventory and Price Game
Despite heightened geopolitical risks, macro-level expectations of oversupply are still constraining oil price gains.
Robert Rennie, Head of Commodity Research at Westpac Banking, believes that crude oil remains caught in a “complex dance” between intensifying geopolitical risks and rising inventories.
Rennie added:
The increase in Venezuelan supply and rising output from other regions could keep oil prices trading in the $50 range throughout the first quarter.
Historical experience also shows that price surges triggered by geopolitical events may be short-lived. Last year, when the U.S. bombed Iran’s nuclear facilities, oil prices spiked but quickly retreated when it was clear production was not affected.
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