How anxious is the current international oil market? This "doubled" indicator explains it all...

Since Israel launched attacks on Iran late last week, both WTI crude oil, the US benchmark, and Brent crude oil, the global benchmark, have experienced significant volatility. One indicator might help illustrate just how serious investors' concerns are about the potential scope of this conflict...

Rebecca Babin, Senior Energy Trader and Managing Director at CIBC Private Wealth, said that the CBOE Crude Oil ETF Volatility Index hit its highest closing level in over three years on Tuesday, indicating that "the market is pricing in multiple tail risks."

"This is a clear signal that traders are increasingly concerned about how the situation might evolve—not just short-term supply disruptions, but broader regional instability," Babin noted.

According to Dow Jones Market Data, the index surged by 26% on Tuesday, closing at $71.56, its highest closing level since March 2022. Described as an estimate of the 30-day expected volatility of crude oil priced by the United States Oil Fund (USO), the index has "doubled" in the past five trading days, rising by 104%.

It's worth noting that the index has also surged after key geopolitical events in the past, but none have been as dramatic as this one.

For example, after Hamas attacked Israel on October 7, 2023, the index rose by 11.7% the following Monday, closing at $39.85, its highest closing level since June of that year. On the day after Trump's April 2 "Liberation Day" tariff announcement, the index rose by 18%, closing at $35.45.

Fawad Razaqzada, Market Analyst at GAIN Capital, said that the situation between Israel and Iran this time is "quite different." "US President Trump stated in a social media post that 'we now have complete control of Iranian airspace,' indicating that the US is engaging in the conflict," he said.

According to multiple media reports, US President Trump is considering a range of options, including joining Israel in air strikes against Iran. He also posted on social media on Tuesday demanding Iran's "unconditional surrender." This has raised questions about whether the US might take action to deepen its involvement in the conflict.

Market data shows that the price of the most-traded July WTI crude oil futures contract in the US rose by $3.07, or 4.3%, on Tuesday, closing at $74.84 per barrel, its highest closing level for the most-traded contract since January this year. The most-traded August Brent crude oil futures contract, the global benchmark, also rose by $3.22, or 4.4%, closing at $76.45 per barrel, its highest closing level since February.

Matt Polyak, managing partner at Hummingbird Capital, said that a key factor driving market volatility is the potential impact on global supply from Iran's export of approximately 1.5 million barrels of oil per day.

According to data from the US Energy Information Administration (EIA), around 20 million barrels of crude oil and condensate were transported through the Strait of Hormuz to global markets each day in 2024, accounting for roughly one-third of global oil trade.

From the perspective of market positioning, Polyak of Hummingbird noted that CFTC data showed that the net managed money position in crude oil on the New York Mercantile Exchange (NYMEX) was in line with the average over the past three years but below the five-year average, suggesting there is still room for long positions to increase.

Meanwhile, Denton Cinquegrana, chief oil analyst at Oil Price Information Service, pointed out that the open interest in WTI contracts is in "free fall, so short positions are undoubtedly being covered."

Short positions refer to bets on falling oil prices, and covering refers to investors buying back the oil they previously sold short.

For example, FactSet data showed that the open interest in the most-traded July WTI crude oil futures contract was around 81,660 lots in Tuesday's trading, down from 144,493 lots on Friday.

Regarding how high oil prices could rise from current levels, CIBC's Babin said that if the situation is limited to Iran-Israel tensions, "some of the gains may already be priced in by the market—especially since the spare capacity of Saudi Arabia and the UAE provides some cushion."

However, she stated, "if there are signs that the situation is escalating into a full-blown regional conflict with direct strikes on infrastructure, then there is still significant upside risk for oil prices."