Inside the trading desks that surfed 12 days of oil market mayhem

Just like in 1991, early spikes quickly turned into routs as traders focused on the reality of whether oil would keep flowing. And it did.

The past fortnight has provided stark evidence of the psychological shift in a market long haunted by memories of cataclysmic price moves driven by Middle Eastern conflict in the 1970s and 1980s. For today’s oil traders, headlines about bombs falling have increasingly become an opportunity to sell.

“Markets today are lot more resilient to news — they go straight to the issue of whether there will be a supply disruption or not, against the backdrop of how much spare production capacity exists,” said Mike Muller, the former head of Vitol Group in Asia and former head of crude trading at Shell Plc.

Muller recalls, as a young trader on Shell’s oil futures desk, trading through the night of Jan. 16, 1991, only leaving his desk in the morning when his bosses ordered him to go home. Shell had decided to sell into any rally, and Muller sold cargo after cargo as the market surged then collapsed.

Today’s traders, much like those in 1991, have spent the past two weeks wrestling with the prospect of the type of supply disruption that only happens once in a generation: an interruption to the Strait of Hormuz chokepoint that ships about a fifth of the world’s oil.

Traders on some desks in Geneva and London worked in shifts to ensure 24-hour coverage — though in reality many stayed awake anyway, scrolling social media feeds and joining emergency calls at 3 a.m. as rumors flew.

As traders tried to work out whether this time was different, they honed in on satellite images over Iran and Hormuz, where not only was there no disruption, but if anything oil flows looked higher. Off the coast of Iran each day, a steady flow of tankers were picking up the country’s barrels and sailing off into the ocean. While Tehran’s empty ships had scattered — likely for security reasons — Iran’s oil was flowing at a rate about 40% higher than the average for the rest of the year.

Still, while traders today have a massive amount of digital information at their disposal, from real-time satellite images to second-by-second “crowd reporting” on social media, some of the world’s top physical oil traders emphasized how they’d spent the past two weeks hunting intel the more old-fashioned way: tapping connections in Washington, Israel and elsewhere for a sense of the war’s direction and Iran’s ability to respond. That intel helped harden convictions that the US would enter the fray, and that Iran wouldn’t shut down Hormuz, they said.

One senior executive said he told staff to follow Donald Trump's social media posts as a guide for what to do next. On June 16, the president posted on his Truth Social site: "IRAN CAN NOT HAVE A NUCLEAR WEAPON."

Options Explode

As the rapid pace of headlines meant trading crude futures suddenly got much riskier, money poured into the options space, where traders are able to take out insurance against a spike at a cheaper cost than trading futures.

There, markets were moving so fast that traders and brokers were constantly having to re-price deals or risk losing business as each fresh headline signaling escalation pushed volatility and the cost of buying such insurance higher, people involved in the market said. Record volumes of options changed hands, and the total amount traded over just seven working days was the equivalent normally seen in several months.

“In times of geopolitical risk traders move to the options market rather than the futures market,” said Nicky Ferguson, head of analytics at Energy Aspects Ltd. “We haven’t seen much change in discretionary hedge fund futures positions over the last month, but their bullish options exposure exploded.”

Tellingly though, traders weren't placing wagers on an astronomical rise in prices at the same pace they have in previous rallies. Even when hostilities between Iran and Israel cooled after attacks in October last year and some contracts had expired, there were still about 130,000 Brent $100 calls outstanding for the next six trading months. Right now those wagers are about 60% of the size they were back then.

While all of the oil market's cogs were suddenly whirring, diesel flows were among those most threatened by any potential disruptions in Hormuz. Prices surged from $85 to $110 a barrel as traders who had been wagering on a global growth slowdown were forced to cover their positions, people involved in the market said.

Meanwhile, on Singapore’s physical oil-trading desks, where barrels from the Middle East are generally bought and sold for refiners in Asia, an uncanny quiet emerged. There, trading of spot cargoes virtually ground to a halt at what would normally be the busiest time of the month, as traders waited to see what happened next.

For derivatives traders, the conflict was punctuated by two weekends that created moments of drama and tough trading decisions. When markets reopened on June 16, prices spiked briefly before retreating as traders focused on the uninterrupted oil flows.

A week later, the stakes were even higher after the US bombed Iranian nuclear sites over the weekend. Yet oil production and trade remained unaffected. Some traders were glued to a newly launched weekend retail product, trying to parse whether it could accurately forecast Monday's trading. Others confidently told clients prices were about to fall, while some described privately how they spent Sunday gearing up to sell at the open, but lost their conviction as Iran vowed revenge. Prices spiked as trading began.

Yet it wasn’t long before the market followed Muller’s cue from 1991: Sell, sell, sell.

Iran’s muted response to the US bombs sent prices plunging, and by the time crude opened on Tuesday morning it was more than $10 below the level it touched when trading began a day earlier. The oil market’s new mantra was clearer than ever: selling oil’s geopolitical spikes had worked again.

The First Gulf War “set the bar for what we now refer to as supply risk premium,” said Muller, the veteran trader. “From that time onwards the trading community has been happy to place their bets on air defences prevailing.”