Long Straddle Definition and Strategies
Trading guides, webinars and stories
Trading guides, webinars and stories
Crude oil is in a bad place right now and that place is the Strait of Hormuz. This narrow sea passage between the Persian Gulf and the Gulf of Oman, serves as the primary naval transport route for Kuwaiti and Persian oil. Approximately one thousand oil tankers pass through this narrow, 52 nautical mile area every month, which accounts for about 20% of the world’s oil trade. To the USA’s chagrin, the straits northern coast belongs to Iran, meaning oil tankers have to travel next to Iranian waters for hundreds of miles.
Ownership of its southern coast is divided between Oman and the United Arab Emirates, neither of which poses a security risk to naval transport. Iran on the other hand has been in a dispute with the UK ever since the former stopped an Iranian tanker bound for Syria when it attempted to pass through Gibraltar. Washington praised Britain at the time and used the opportunity to begin forming a coalition to take international action. One of their aims was to station a fleet of ships in the Strait of Hormuz to ensure safe passage.
The initiative paid off, since following the incident at Gibraltar the media was flooded with reports of piracy. Allegedly Iranian ships attempted to impede a British tanker, however, they themselves were intercepted by the British navy. Although the Iranian and Russian media downplayed these events, for the rest of the world they served as an example of the security risk Iran poses. If Iran’s aim were to retaliate for what happened at Gibraltar, their fleet is more than enough to do so even despite the presence of a British military vessel. On the other hand, mobilizing said fleet to take action in an official capacity would be equivalent to an open declaration of war. Acting in such a manner could severely damage Iran’s credibility with other countries, which would put them at a disadvantage in their conflict with the US.
Although news of the Iranian fleets alleged misdeeds is somewhat concerning, it does have its upsides for the US. Back in June the price of oil struggled at $50, however, the recent attacks gave it the momentum to finally break $60. US oil companies in particular were overjoyed, since they had increased their daily production from 8 million barrels to 18 million over the past 7-8 month.
The current administration’s policies have led to an explosive increase in domestic oil production, moving the country significantly closer to energy independence. Its current production is enough to cover 90% of the 20 million barrels the country consumes on a daily basis. With its own supply firmly secured, the US has set its sights on increasing its presence in the global oil market. The countries that mainly depend on the oil passing through the Strait of Hormuz are China and India, so keeping the route open is of critical importance to them. This begs the question of whether they’re willing to lend any financial or even military aid to the country that takes up the task of securing safe passage. On the other hand, whether or not seeing Chinese warships along Iran’s coast is in the USA’s best interests remains an open question.
There’s a possibility that the USA’s best interest is to simply maintain the current tense status quo. Iran may be hostile to the US, but they’re also aware that they cannot win a direct military confrontation. The revival of their nuclear program suggests that they have little faith left in Europe’s support, meaning they’re taking steps to ensure they’re in a good bargaining position. Most military analysts agree that if it came down to an open military conflict, the best Iran could do would be to limit passage through the Strait of Hormuz for about a month or two before the US completely dismantles their entire military infrastructure. Iran wouldn’t even be able to completely block the area, since that would significantly hurt the interests of countries that support them. Their primary targets in such a scenario would be British and US tankers, although the effect that would have on the US economy is marginal at best.
The responsibility of securing the strait to enforce the sanctions on Iran’s oil trade fell on the US as the primary advocate of said sanctions, however, it’s also an opportunity to advance its interests. An uncertain supply of oil could lead to a rise in prices, which in turn gives Washington an excuse to continue pressuring OPEC to increase their production. If this increase is notable enough to completely replace Iranian oil, the country would face the risk of losing its supporters. To them it could potentially be a greater threat than open war.
Going by the above, the most advantageous way for the US to resolve its conflict with Iran is to keep the sanctions in place and tensions high, to ensure oil prices don’t fall. If price reaches $70-75, US oil companies could be looking at an enormous profit, while countries that import it might find themselves in an uncomfortable position.