Chinese teapot refineries provide the wildcard. These independent processors lack strategic reserves and sophisticated hedging. They’ll pay any price to keep units running, creating a bidding war against Japanese and Korean buyers.
The Doomsday Trade: Strait of Hormuz Closure Means $150+ Oil
The tail risk keeps risk managers awake – Iran mining the Strait of Hormuz. Twenty-one million barrels transit daily through that 21-mile chokepoint. Even temporary closure sends prices vertical.
This scenario requires Iranian desperation. Tehran knows blocking Hormuz brings U.S. carrier groups and potentially ends the regime. But cornered leaders make irrational choices. Traders assign 10% probability, yet the outcome devastates portfolios.
Bloomberg Intelligence modeled prolonged regional war at $150 oil, slashing global GDP by $1 trillion. The 1973 Arab embargo provides the template – prices quadrupled as 5 million barrels vanished. Today’s disruption could hit 6-8 million barrels between Iran, insurance boycotts, and precautionary Saudi cuts.
Position for Volatility, Not Direction
Smart traders aren’t picking sides – they’re buying volatility. Straddles and strangles capture explosive moves either direction. Energy equity options offer better risk-reward than futures in backwardated markets.
Watch calendar spreads closely. Near-term contracts price immediate disruption while back months reflect normalized supply. That spread reveals market expectations for conflict duration. Currently, the Dec-25/Jun-26 spread suggests temporary disruption.
Risk management trumps speculation here. Size positions for double-digit daily moves. Trail stops aggressively on winning trades. This environment rewards discipline over heroics.
More Information in our Economic Calendar.
