The oil market is experiencing its strongest start to a year since 2022, driven by supply shocks and the impact of sanctions, which have defied earlier expectations of a surplus. This has spurred traders to hedge against the possibility of renewed US military action against Iran. A significant increase in activity within futures and options markets is contributing to rising crude prices. Brent futures reached a seven-month high of over $US72 a barrel on Friday, with some analysts estimating a risk premium of up to $US10. Brent crude has risen approximately 18 per cent since the end of last year, a substantial shift from previous forecasts of a record surplus.
Former US President Donald Trump indicated on Friday that he was considering a limited strike on Iran, having amassed the largest US military force in the region since 2003. This geopolitical uncertainty is further exacerbating market anxieties. The number of Brent oil futures held has reached an all-time high this year, and last month saw record trading volumes in options designed to protect against additional price rallies.
Volatility in the oil market has surged to its highest level since the US last engaged in military action against Iran in June. Traders have been charging premiums for an extended period to safeguard against potential price surges. Despite these factors, the fact that prices have not increased even more significantly highlights the extent of global output expansion.
The price of oil is affected by various factors, with geopolitical tension being a primary one. The possibility of further conflict in oil-producing regions continues to fuel market speculation and hedging activities.
