Iran Unrest: Oil Traders Confront New Risks Days After Venezuela Crisis

The oil market is becoming increasingly responsive to events in Iran, where there have been deadly protests — and threats of US retaliation — in the past several days.

Brent oil futures have risen more than 4% in the past two sessions — having previously given up all gains from the aftermath of US forces capturing Venezuelan president Nicolás Maduro at the weekend. Traders are also paying the biggest premiums for insurance against a future rally since Israel and Iran exchanged air strikes in the summer.

While the situation in Venezuela quickly turned into a price drag as it emerged that the US planned to take millions of barrels of the nation’s oil to the global market, Iran is a far bigger producer and exporter, and so any supply disruption there would be more impactful.

The death toll in Iran since the unrest began late last year has risen to 42, according to the US-based Human Rights News Agency, which tracks protests and the activities of political activists in Iran. In an interview, US President Donald Trump reiterated warnings to Tehran against killing protesters, saying “if they do that, they’re going to have to pay hell.”

“The focus has now shifted to Iran, where violent protests have erupted,” said Arne Lohmann Rasmussen, chief analyst at A/S Global Risk Management. “There is also growing concern in the market that the US, with Trump at the helm, could exploit the chaos to attempt to overthrow the regime, as we have seen in Venezuela.”

There were acute tensions involving Iran as recently as last summer, when the country came under attack from the US and Israel, prompting concerns at the time that Tehran might move to harass shipping on Strait of Hormuz shipping corridor through which Middle East energy flows.

Those fears didn’t turn into significant disruption and prior protests also had no major impact on Iranian supply. However, the tensions come just after the US blockaded Venezuelan oil flows and also at a time when a key part of the futures markets — from trend-following traders to index funds — are adding to bullish flows.

The scale of Iranian risk shows up clearest in options markets, where the skew toward bullish calls is the biggest for US crude futures since July. 

The global head of oil at Trafigura Group, one of the world’s top commodity traders, told Bloomberg TV this week that the bullish wild card the oil market is currently worried about is Iran, rather than risks to Venezuelan supply. 

The US military operation in Caracas had limited impact on prices because the Latin American country’s role as a supplier has shriveled in recent years amid US sanctions and dilapidated infrastructure.

Tehran has restricted internet and phone access as part of efforts to curb protests that are the biggest challenge to the country’s Supreme Leader Ayatollah Ali Khamenei since a nationwide uprising in 2022. 

Iran has managed to recover from US sanctions and export controls. The Persian Gulf state produces more than 3 million barrels a day of crude, as well as further volumes of natural gas and other light liquids. Its exports stood at around 2 million barrels a day in October and November, the vast bulk of it going to China.

The Iranian risk is amplified because oil traders have been holding large bearish wagers in anticipation of an oversupply, leaving room for a sharp reversal if those bets unwind. 

Trend-following commodity trading advisors were buying crude on Thursday and will continue to do so in the coming days if prices hold, according to James Taylor, head of the quant service at Energy Aspects.

Those moves have been coupled with bullish options flows, with more than 750,000 Brent calls trading this week, the most since October, including large volumes of $80 calls, a trade people involved in the market said was a hedge against a spike. 

Over the coming days, RBC also estimates that more than $6 billion will flow into the market from an annual rebalancing by commodity index funds, adding to the bullish tailwinds from geopolitical risks. 

“With CTAs, index flows and options dealers, there is the tailwind in terms of financial flows,” said EA’s Taylor said.