Middle East Tensions Rattle Oil Markets: Brent Returns to $90, Geopolitical Risk Premium Transmits Through the Supply Chain

Recently, escalating tensions in the Middle East have once again become a core variable in the global crude oil market. As geopolitical risk premiums are repriced into valuation models, Brent crude futures have returned to the key psychological level of $90 per barrel after several months. This price recovery not only reshapes the positioning structure and volatility curve of the crude futures market but also, through cost transmission mechanisms, generates significant ripple effects across downstream petrochemical, aviation, and logistics supply chains.

Geopolitical Risk Premium: From Impulsive Shocks to Sustained Support

Unlike the single-day impulsive surges triggered by past sudden events, the current disruption from Middle East tensions exhibits greater persistence. Market participants generally believe that potential escalation paths—whether direct strikes on energy infrastructure or the extreme scenario of blocked passage through the Strait of Hormuz—are unlikely to be completely ruled out in the short term. This uncertainty spreads the risk premium from near-month futures contracts to far-month ones, shifting the forward curve from a slight contango to a steeper backwardation, reflecting strengthening expectations of immediate supply tightness.

According to analyses from multiple international energy research institutions, the geopolitical risk premium in current Brent prices is estimated at $5 to $10 per barrel. This figure is not a precise statistical result but is derived from comparing option-implied volatility with price reactions during historical conflict events. Notably, similar to the early stages of the Russia-Ukraine conflict in 2022, speculative net long positions have increased significantly recently, but commercial hedging demand (e.g., from airlines and refiners) for bullish call options is equally robust, indicating that the physical industry is preparing for prolonged higher oil prices.

Futures Market Structure: Rebalancing Volatility and Positioning

In the derivatives market, the key indicator measuring future price uncertainty—crude oil option implied volatility (IV)—has surged from pre-conflict lows. Reports indicate that the one-month IV of at-the-money Brent options has broken above the year's high of 40%, while three-month IV has also risen in tandem, showing that market concerns over medium-term price fluctuations have not subsided despite diplomatic efforts. Meanwhile, the skew indicator for put and call options has reversed: previously, put protection premiums existed due to weak demand, but now call option premiums dominate, meaning traders are more willing to pay for upside price risk.

Changes in positioning structure are equally noteworthy. According to the Commitment of Traders report from the Intercontinental Exchange (ICE), during Brent's return to $90, managed money net longs increased for three consecutive weeks, while producers' and traders' short hedging ratios also rose simultaneously. This situation of both sides increasing positions often signals growing market divergence, potentially amplifying subsequent price volatility. For domestic crude oil futures (SC), the price spread with international oil prices (i.e., the internal-external spread) has widened recently, partly reflecting changes in RMB exchange rates and freight costs, providing opportunities for cross-market arbitrageurs.

Downstream Supply Chain: Cost Impact and Profit Redistribution

As the "king of commodities," crude oil's price rise transmits to downstream supply chains in a multi-layered, non-linear manner. The refining and chemical industry bears the brunt. Under the refined product pricing mechanism, gasoline and diesel prices typically adjust upward relatively quickly following crude, but chemical products (such as ethylene, propylene, and PX) experience a lag in price transmission. According to industry estimates, when Brent is around $90, refiners' integrated gross margins (crack spreads) come under pressure, especially for light hydrocarbon cracking units using naphtha as feedstock, where cost pressures are more pronounced. Some high-cost capacity may be forced to reduce operating rates, thereby supporting chemical prices in the medium term.

Aviation and shipping are another major loser from rising oil prices. Jet fuel costs typically account for 30-40% of an airline's operating expenses. Brent's return to $90 means airlines will face upward pressure on fuel surcharges, which may eventually be passed on to consumers. In the container shipping market, very low sulfur fuel oil (VLSFO) prices have strengthened alongside crude, combined with rerouting due to geopolitical risks (e.g., Red Sea diversions via the Cape of Good Hope), leading to reduced effective capacity and a recent rebound in freight rate indices. This dual increase in "oil prices + freight rates" has a non-negligible inflationary effect on global trade.

In contrast, upstream oil and gas exploration and production companies are direct beneficiaries of this price surge. Whether international oil majors or domestic "three barrels" (CNPC, Sinopec, CNOOC), the profit elasticity of their upstream segments expands significantly during oil price upswings. Additionally, oilfield services (e.g., drilling, fracturing) may see improved order prices and utilization rates, but note that simultaneous increases in cost inputs (steel, labor) could partially offset gains.

Macro Linkages: Inflation Expectations and Monetary Policy Constraints

Sustained high oil prices are rekindling concerns about inflation stickiness. According to recent public remarks by Federal Reserve officials, energy prices are an important external variable affecting core CPI. If oil prices remain at current levels, expectations for the timing of rate cuts may be delayed. This macro-level linkage, in turn, affects dollar-denominated crude futures through the dollar index and Treasury yields—a strong dollar typically pressures oil prices, but currently, geopolitical dominance clearly outweighs currency factors.

For the Chinese market, rising crude import costs will push up the Producer Price Index (PPI), but transmission to downstream consumer goods is relatively moderate, thanks to domestic policies ensuring supply and price stability for certain basic energy prices. However, in the derivatives market, domestic investors have been hedging cost risks by buying crude call options or going long on fuel oil futures, with volumes and open interest in related products increasing notably recently.

Outlook: When Will the Risk Premium Fade?

Looking ahead, whether Brent can hold above $90 depends on two core variables: first, whether the Middle East conflict escalates further or moves toward de-escalation; second, marginal changes in the global oil supply-demand balance. On the supply side, OPEC+ production cuts remain in place, but compliance with compensatory reduction plans by some members (e.g., Iraq, Kazakhstan) is questionable. On the demand side, there is a tug-of-war between weak global manufacturing PMIs and the summer driving season. If geopolitical risks cool, the risk premium could quickly unwind, potentially pulling oil back to the $80-85 range; conversely, if the conflict expands to key production facilities, Brent could target $100.

For derivatives traders, the optimal strategy in the current environment is not to bet unidirectionally but to manage uncertainty through option combinations (e.g., bull call spreads) or cross-commodity spreads (e.g., long crack spreads). After all, in geopolitical-driven markets, the effectiveness of fundamental analysis temporarily yields to event-driven logic, and risk management—rather than profit maximization—is the key to navigating volatility cycles.