Analysis: Global Oil Markets Volatile Amid Middle East Geopolitical Tensions

In the wake of recent hostilities in the Middle East and the wider Middle East, global oil prices have been volatile, with Brent crude oil prices being particularly affected because of disrupted supplies in the Middle East , Saudi Arabia, Iraq, and other major producers in the region. The volatility has widened the differential between WTI and Brent crude prices, signalling heightened geopolitical risks.

While the situation is still unfolding and nervous market participants await clarity, the biggest supply-side risks are a prolonged conflict and potential medium-term closure of the Strait of Hormuz. Characterised as an oil chokepoint, in 2024-2025, an estimated 20% or 20 million bpd of the global oil supply was transported through the strait.

After the latest tensions, major marine insurers stopped insuring traffic travelling through the waterway, effectively halting flows and reducing crude oil volumes to around 2.8 million bpd. Asian markets are likely to be the most affected by supply disruptions as their demand accounted for 84% of the energy flows through the Strait of Hormuz, according to EIA 2024 numbers.

At the time of writing, the CBOE’s Volatility Index (VIX) has spiked, indicating that animal spirits are at least partly driving crude oil prices as CFD and other oil traders react to increased risks centred on the regional conflict.

Unlike ‘traditional’ oil trading, contracts for difference (CFDs) offer market participants more flexibility to enter and exit trades at an arguably lower cost and potentially benefit from either price direction. Yet the uncertainty and volatility percolating through the oil and energy markets are equally felt.

OPEC, US government response

While it’s accurate to say that risks have risen, CFD traders are also likely pricing in other, and possibly more reassuring factors, that transpired after the US government promised marine insurance and naval escorts through the Strait of Hormuz. Adding to this, at the beginning of March, OPEC agreed to a higher-than-expected crude oil output of 206,000 bpd as of April, versus an expected 137,000 bpd, signalling confidence around fundamentals.

Another factor is that alternative routes to the Strait of Hormuz could be employed. For example, Aramco’s East-West pipeline and the UAE’s pipeline have a combined capacity of around 6.8 million bpd, according to the EIA. But this possibility is tempered by the risk of damage to the pipelines during the conflict.

While these factors appear to be more positive under the circumstances, the newsflow from military action in the Middle East and the Gulf states is likely to be the stronger immediate driver of sentiment and volatility around crude oil prices, meaning that traders should stay informed and manage their risk wisely when placing trades on energy CFDs.

Outlook for crude oil

In the short-term, crude oil prices are likely to stay elevated amid market jitters, and statements from the US government will be closely watched for signs of peace negotiations between the sides. A potential resumption of traffic through the Strait of Hormuz under US military protection could see spot crude oil prices falling. On the other hand, traders might react with more panic buying and defensive trading if neither of these scenarios become a reality over the next few weeks.

If market fears are realised and the conflict is prolonged into the medium term, it will likely weigh more heavily on Brent crude sourced from the Gulf region, compared to WTI supplies produced in the US and Canada which are not exposed to military action.

Finally, the longer that crude oil shipping through the Strait of Hormuz faces restriction, the higher the costs will rise for regional industry and transportation in Asia, potentially weighing on economic growth in the region.

When charting their way through the energy market opportunities at the end of the first quarter and moving into the second quarter, traders should manage their risk and stay as informed as possible with the latest news updates.