Crude rallies as Middle East tensions spike; risk premium overshadows macro headwinds
Crude prices surged this week after Israel launched military strikes on Iranian territory, injecting a sharp geopolitical risk premium into the market. Iran was responding with a missile barrage on Tel Aviv as of Wednesday afternoon. The WTI prompt-month contract rose $4.94 to settle at $72.98/Bbl for the week, its highest close since early February.
The first attack, which reportedly targeted Iran’s nuclear and military infrastructure, pushed WTI as high as $78/Bbl Thursday night. Although Iranian officials reported no damage to production, refineries, or storage facilities, and confirmed that fuel distribution continued uninterrupted, markets responded to heightened uncertainty. The possibility of a broader conflict threatens a region responsible for roughly one-third of global crude output and raises the risk of disruption through the Strait of Hormuz, a chokepoint that handles nearly a quarter of global oil flows. In our view, the possibility of oil disruptions is still low, unless the scope of the conflict increases.
While physical supply remains unaffected, the perceived risk of escalation has reshaped positioning across the futures curve. Front-month contracts led the rally, while longer-dated prices moved only modestly. As a result, the WTI curve, previously backwardated through 2026 before flattening into contango, is now more deeply backwardated across the board, but especially for the rest of 2025.
Fundamentals, however, remain soft. The EIA’s June Short-Term Energy Outlook forecasts a global supply surplus of 800,000 Bbl/d in 2025 and inventory builds of 600,000 Bbl/d in 2026. The projected imbalance is driven by an accelerated OPEC+ production schedule and continued growth from non-OPEC producers such as Brazil, Canada and Guyana.
-----------------------------
Based on preliminary data, Friday became the largest volume of hedges ever traded by or through AEGIS as of around 12:30PM. At around 1PM, the day set the record for the largest number of trades. Of course, it was almost entirely crude oil swaps.
-----------------------------
AEGIS maintains a neutral-to-bearish stance on crude fundamentals. This week’s rally was driven by geopolitical risk, not physical supply loss. With infrastructure intact and exports uninterrupted, the move reflects near-term uncertainty rather than a structural tightening of balances. While volatility may persist, the medium-term outlook remains anchored by expectations of oversupply through 2026.
-----------------------------
If your hedging policy and strategy did not allow you to hedge today as quickly or as much as you wanted, we would enjoy helping you figure it out for the future. Send a note to info@aegis-hedging.com.
-----------------------------