BAKU, Azerbaijan, October 3. The war between
the U.S. and Israel against Iran has significantly disrupted the
oil market, causing sharp price fluctuations and forcing market
participants to quickly adjust their positions and risk management
strategies.


This was stated in a report by the Oxford Institute for Energy
Studies (OIES) titled “Shifting Oil Market Positioning During the
Strait of Hormuz Crisis.”


Disruptions to oil flows through the Strait of Hormuz were
particularly significant, affecting not only the availability and
destinations of physical oil supplies but also the functioning of
the oil derivatives market.


According to the report, open interest in oil futures fell
sharply as financial speculators reduced their positions amid
significant price volatility, higher margin requirements, and
growing pressure to reduce positions due to tighter value-at-risk
(VaR) limits.


"At the same time, oil options have become a more sought-after
instrument for expressing and managing risks associated with market
movements during overnight trading. The use of short-term option
contracts has increased significantly.


Differences in the behavior of producers, trading companies,
refiners, and consumers (PMPU), as well as swap dealers, have led
to differing positioning dynamics in the Brent and WTI markets.


PMPU’s net position in Brent became significantly shorter during
the first three months of the war, after which it began to shift in
the opposite direction.


“This trend generally coincided with changes in crude oil trade
flows, as refiners sought to offset supply disruptions caused by
the closure of the Strait of Hormuz, including by increasing
imports from the U.S. and other alternative sources,” the report
states.


At the same time, the PMPU’s net position in WTI remained
relatively positive. According to OIES estimates, this may partly
reflect the release of oil from the U.S. Strategic Petroleum
Reserve (SPR) and the associated hedging of future obligations to
return the oil.


The report also notes a significant difference in the structure
of positions held by money managers across various segments of the
oil market.


"For example, the activities of systemic participants using
trend-following strategies were focused primarily on Brent, while
positions in WTI and petroleum products were largely established by
discretionary traders.







Initially, discretionary positions were concentrated primarily
on Brent, but subsequently shifted toward refined products as the
consequences of disruptions in refined product supplies from the
Gulf countries, attacks on Russian refineries, and declines in
crude oil imports and refining volumes in China became more
apparent," the OIES report states.


A significant portion of PMPU activity in the crude oil market
is linked to physical market participants, including trading
companies that move oil between different destinations and over
time.


“As physical trade flows change, these companies adjust their
derivative positions to manage price and basis risks associated
with the purchase, transportation, and delivery of oil,” the
document notes.


The OIES believes that significant disruptions in oil flows from
the Middle East following the outbreak of the war help explain the
unusual dynamics of PMPU positions.


According to the report, PMPU’s net position in Brent fell
sharply after the war began, reaching approximately minus 600,000
lots by mid-May, which is about 250,000 lots more in short
positions compared to early March.


"Then the trend reversed: starting in late May, PMPU’s net
position began to recover, and from late July onward, it gradually
became less short.


Notably, this trend mirrored changes in U.S. crude oil export
volumes, which rose from approximately four million barrels per day
to about 5.5 million barrels per day by mid-May, and then fell to
about 3.5 million barrels per day by the end of July," the report
states.


The institute also notes that the situation in Asia may have
further reinforced this trend.


“During the initial disruptions, some Asian crude oil buyers
changed their pricing mechanism for U.S. oil purchases, switching
from Dubai to Brent, as the Dubai benchmark was experiencing an
unusual and volatile period,” the report states.