Ongoing conflicts in Iran and Ukraine continue to roil energy prices and keep geopolitical trajectories highly unpredictable, making commodity traders increasingly wary of holding long-dated positions. These traders are now concentrating their derivatives exposure in shorter time frames and becoming far more selective, pivoting from broad-based commodity exposure toward specific instruments. They are actively scrutinizing their portfolios and shedding unwanted risk assets, a shift that is draining liquidity from the oil trading market, particularly for far-dated contracts.

With hostilities simultaneously threatening Persian Gulf exports and the Red Sea alternative route, oil prices have already blown past the $100 mark. Following the US claim of destroying five Iranian oil tankers, Iran announced retaliatory measures. Concurrently, Iran-backed Houthi rebels launched deep strikes into Saudi territory, setting energy facilities ablaze and once again raising serious doubts about the safety of exports transiting the Red Sea. As of September 9, the latest data from the oil futures market shows the international benchmark, Brent crude, climbing 2.2% to $100.07 per barrel, breaching the $100 threshold for the first time since July. WTI crude rose 1.83% to $94.73 per barrel. Brent's year-to-date gains now exceed 60%.

Currently, navigational constraints at two crucial global energy transit chokepoints—the Strait of Hormuz and the Bab el-Mandeb—remain severe. Preliminary data from Kpler shows only six cargo vessels transited the Strait of Hormuz on September 8, down from nine the previous day and below the recent 10-day average of twelve. The Bab el-Mandeb saw 25 transits that day, slightly below the recent daily average of 27. While the level of disruption differs between the two straits, the threat of attacks in the Bab el-Mandeb is escalating pressure for further detours, particularly for tankers hauling Saudi crude from Red Sea ports to Asia.

The cost of these diversions can now be quantified in exact voyage terms. For instance, a route from Saudi Arabia's Yanbu port to Taiwan, previously transiting the Bab el-Mandeb in roughly 19 days, now requires an approximately 48-day journey by rerouting north through the Suez Canal, across the Mediterranean and Gibraltar, before rounding the Cape of Good Hope—adding 29 days. Fuel costs would surge from $1.26 million to $2.87 million, a rise of about 127.8%, plus an additional Suez Canal fee of roughly $1 million. Based on these rounded figures, the combined increase in fuel costs and new canal fees totals approximately $2.61 million, powerfully illustrating that even with overland pipelines bypassing Hormuz, maritime transport can still incur hefty risk-avoidance expenses.

Morgan Stanley: War-Weary Oil Traders Avoid Long-Term Bets

As the wars in Iran and Ukraine cast a shadow over market prospects beyond the next few months, traders in the oil futures market are becoming increasingly cautious about longer-dated positions. Brendan Ross, co-head of global oil trading at Morgan Stanley, notes that traders are concentrating derivatives exposure in shorter time frames and adopting a more "calm and prudent" approach to risk. He adds that as geopolitical risks rise, traders' choices are becoming more stringent, shifting from holding broad derivatives exposure to selecting specific instruments.

"People are being much more precise about the risks they want to take," Ross said at the APPEC conference in Singapore on Wednesday. "They have identified which risks they actually want to carry and which ones lead to unexpected, sustained losses." Global geopolitical conflicts are disrupting supply and unsettling the oil market, with intermittent clashes in Iran and Ukraine clouding the outlook for energy commodity trading. Rapidly shifting dynamics between Washington and Tehran, coupled with continuous hostilities between Russia and Ukraine, are causing repeated violent swings in the oil market. The stop-and-start negotiations between Washington and Tehran, alongside Ukraine's repeated attacks on Russian energy infrastructure, are amplifying volatility across the entire energy complex. This year, Brent prices have oscillated between roughly $60 and $126 per barrel, with refined product prices experiencing even sharper swings.

Ross emphasized in an interview that traders are reviewing their portfolios, shedding risks they aren't truly willing to bear, which is causing liquidity to dry up across markets, especially in longer-dated contracts. "People are really only trading the front three-to-six months, and as you go further out, the lack of liquidity just feeds on itself," he said in the interview. Refined products have been hit hardest by the conflicts, as production and trade disruptions tighten global supply. US retail diesel prices hit a record high last week, while fuel costs across Europe have also surged dramatically amid a deepening global shortage.

"In terms of the disconnect between physical and financial markets, clearly it's mostly in products," Ross said. This dynamic of "tight supply, cold back-month" means the market is pricing a greater scarcity for immediately deliverable oil, yet there's less trading depth for forward price discovery. Disruptions to crude supply and transport support spot and front-month prices, making it easier to form or widen a backwardated structure where near-term prices exceed far-dated ones. If refinery outages further squeeze supplies of diesel and other products, their price gains could outpace crude, pushing up crack spreads and widening regional price differentials. Simultaneously, fewer participants in far-dated contracts weaken price discovery and widen bid-ask spreads, making even small orders capable of triggering significant volatility. For refiners, traders, and fuel users, hedging solely with crude futures makes it harder to cover risks associated with product shortages, regional price spreads, and shipping cost changes.

After Middle East Tankers Become Targets: Repricing from Supply Shock to Equities and Bonds

A comparison of benchmark rates for the same tanker route before and after the war vividly demonstrates the impact on freight costs and Middle East energy supply. The Baltic Exchange's weekly report from February 27 showed the TD3C route, shipping 270,000 tonnes of crude from the Middle East Gulf to China, at a Worldscale rate of WS216.89, with the standard VLCC round-trip time-charter equivalent earnings at $209,550 per day. By September 4, the corresponding figures had surged to WS677.22 and nearly $704,000 per day. According to these calculations, the WS index rose approximately 212.2% from pre-war levels, translating to a roughly 236.0% surge in daily earnings. The former reflects changes in freight rates on the same route, while the latter is the daily earnings after deducting voyage costs; together, these indicators show that severely constrained energy supply, transport risks, and tight effective vessel capacity have significantly raised the economic cost of tanker shipping.

Attacks on tankers near Kharg Island, Iranian threats to strike tankers at Kuwaiti and Bahraini ports, and Houthi assaults on Saudi energy facilities are expanding risks across three fronts: export loading, route security, and refining operations. Crucially, when refinery outages are combined with disrupted product transport, even if some crude can be exported via alternative routes, fuels like diesel may still face sustained shortages. This also explains why Ross highlights that the disconnect between physical and financial markets is primarily in refined products: simply betting on Brent's direction may not cover the actual risks of a diesel shortage in a specific region, delivery delays, or rising freight costs.

Wall Street's price forecasts are increasingly contingent on conflict duration and damage severity. Bank of America predicts Brent could trade in a $95–$120 range through year-end if low-level conflicts that restrict flows persist. However, if the conflict escalates and severely damages key energy infrastructure, there is a risk of prices spiking toward $150 per barrel. These two scenarios correspond to different levels of supply loss. Morgan Stanley's observation of concentrated three-to-six-month trading suggests traders are shortening their decision horizons because the constant flip-flopping between ceasefire talks and military escalation makes long-term supply-demand forecasting harder to execute. Fewer participants in far-dated contracts significantly raises the cost of adjusting positions and exiting trades.

For US equities, the impact depends on how long high oil prices persist and their transmission to inflation, corporate profits, and interest rates. On September 8, the 10-year Treasury yield rose to 4.805%, while the S&P 500 fell about 0.6%. Meanwhile, the energy sector has gained over 40% year-to-date. Energy producers are getting price support, but consumer and industrial companies are facing reduced purchasing power and higher input costs. If long-end yields continue to climb, financing costs and valuations for high-multiple companies will come under pressure. The resulting investment narrative across stocks and bonds is clear—energy supply scarcity creates selective profit opportunities, while high oil prices and tightening liquidity raise the overall cost of risk-taking across the market.