Middle East tensions ignite market concerns, CBOE crude oil volatility index hits three-year high.

After launching attacks on Iran over the weekend, global and U.S. benchmark oil prices experienced significant fluctuations, with one indicator becoming a key signal for investors to assess the severity of the Middle East situation - the CBOE Crude Oil ETF Volatility Index (OVX). According to Dow Jones market data, as of the close of trading on Tuesday, the OVX index surged by 26% to 71.56, reaching its highest closing level since March 2022. Over the past five trading days, the index has increased by 104%. The OVX index reflects the expected future 30-day volatility in the crude oil market based on the price of the United States Oil Fund (USO.US), widely seen as a "fear index" measuring market uncertainty. Rebecca Babin, senior energy trader at CIBC Private Wealth Management, said that the surge in volatility indicates that the market is pricing in extreme risks not only related to short-term supply disruptions but also reflecting concerns about more widespread regional turmoil. Historically, OVX has experienced sharp fluctuations due to events such as the GEO Group Inc incident. For example, on October 7, 2023, after Hamas attacked Israel, OVX rose by 11.7% on the next trading day, closing at 39.85, the highest since June of that year. Similarly, after Trump announced new tariffs on "Liberation Day" on April 2, 2024, OVX also surged by 18%, closing at 35.45. However, compared to the recent Iran-Israel conflict, the previous fluctuations were relatively mild. Fawad Razaqzada, market analyst at City Index and FOREX.com, pointed out that the current situation is "very different", especially in the context of U.S. President Trump's statement implying that the U.S. may directly intervene in the situation with Iran. Last Friday night, Israel launched attacks on Iran over concerns about the escalation of Iran's nuclear program, leading to a retaliatory missile strike from Iran, escalating tensions in the Middle East. In this context, oil prices also experienced sharp fluctuations. U.S. July-delivery West Texas Intermediate (WTI) crude oil rose by 4.3% on Tuesday, closing at $74.84 per barrel, the highest closing price for the front-month contract so far this year. Global benchmark August Brent crude oil also rose by 4.4%, closing at $76.45 per barrel, hitting a high since February. The core factor driving market volatility is concerns about the potential impact on global oil supply. Matt Polyak, managing partner at Hummingbird Capital, stated that Iran currently exports about 1.5 million barrels of oil per day, and any disruption could disrupt global supply. In addition, data from the U.S. Energy Information Administration (EIA) shows that an average of 20 million barrels of oil are transported through the Strait of Hormuz daily in 2024, accounting for about 20% of global liquid oil consumption. The strait is located between Iran and Oman and is one of the world's most important oil shipping channels. In terms of market fund flows, current data from the Commodity Futures Trading Commission (CFTC) shows that net speculative long positions for New York Mercantile Exchange crude oil are in line with the three-year average, below the five-year average, indicating that there is still room for further long positions. Meanwhile, Denton Cinquegrana, chief oil analyst at Oil Price Information Services Group, Inc. (OPIS), pointed out that the number of open contracts for WTI crude futures is declining rapidly, indicating that short positions are covering. According to FactSet data, open positions for the WTI main contract decreased from around 144,493 on last Friday to approximately 81,660 on Tuesday. Will oil prices continue to rise in the future? Babin believes that if the conflict remains limited to Iran and Israel, the current price increases may already reflect the main risks, especially considering that Saudi Arabia and the UAE still have a certain amount of spare production capacity to provide some cushion. However, she also emphasized that "if the situation escalates into a full-blown regional conflict involving direct attacks on key infrastructure, there is still significant upside risk for oil prices."