Oil Above $100: Why the Bullish Case for Oil is Still in Play

The world still has plenty of oil. The challenge for energy markets right now is getting enough crude to refineries in time to meet demand for finished products. The disruption in supply channels, combined with limited spare capacity to absorb another shock, is one of the biggest risks to the economy.

Brent crude is back above $100 a barrel as of Wednesday, while West Texas Intermediate is pushing toward that same level. Brent is 25% higher than it was a month ago. The obvious reason is the continuing conflict between the United States and Iran, including attacks on U.S. military installations in the Middle East and subsequent attacks on Iranian oil vessels in the Strait of Hormuz. Add to that the Houthis striking Saudi energy infrastructure and shipments through the Strait of Hormuz being severely curtailed. Those are the headlines the media wants to attribute to the rise in oil prices over the last 30 to 60 days. But there is another important point that, although created by the conflict in the Middle East, will not necessarily be resolved immediately once the conflict ends: the margin of error in the energy market has become increasingly thin.

Normally, when oil prices rise because of a temporary disruption like we have seen in the Strait of Hormuz, the market has several ways to respond. OPEC can increase production, strategic petroleum reserves can be released, commercial inventories can be drawn down, other producers like the U.S., Canada, or Venezuela can increase exports, and eventually higher prices can reduce demand. It is often said that the best solution for high gas prices is high gas prices. The law of supply and demand often takes care of itself.

The problem today is that several of those shock absorbers have already been used. According to the EIA, U.S. commercial crude inventories fell another 4.5 million barrels in the week ending August 28 to roughly 424.5 million barrels. Refinery utilization reached 98%, the highest level since 2018, while U.S. crude exports climbed to about 4.5 million barrels per day.

The Strategic Petroleum Reserve fell to approximately 285 million barrels last week, its lowest level since 1982. That does not mean the country is running out of oil. It means one of the shock absorbers normally used to suppress an externally caused supply shock does not have as much ammunition as it once did.

OPEC is another example of a solution that is hard to get to market. On Sunday, OPEC decided to leave its October production policy unchanged after completing the planned rollback of 1.65 million barrels per day of earlier cuts. On paper, that sounds bearish for oil because more OPEC production should mean more supply and lower prices. The problem is that OPEC is still running below its targets because some barrels cannot reach the market. Saudi Arabia and other Gulf producers may want to get more oil to market, but regional shipping constraints limit how quickly additional barrels can reach refiners. OPEC can increase production quota, but that does not guarantee more usable crude actually reaches refiners around the world.

Delivering supply to refiners and simply pulling crude out of the ground are two different things. You can have oil waiting to be drilled in Iraq, Qatar, or Saudi Arabia, but if tankers cannot safely move through the necessary shipping lanes, a refinery in Asia that needs crude still has a problem. Estimates from the IEA and World Bank suggest the disruption connected to the Middle East conflict has removed roughly 8 to 10 million barrels per day from normal supply or trade flows at various points during the crisis. That is a large enough number that a headline announcement about an OPEC production increase or a strategic petroleum release from a sovereign country may not have the same impact it would have had a year ago.

So, back to the question of supply and demand: higher prices destroy demand, right? China is particularly important here. Sinopec’s research arm now estimates that Chinese oil demand could fall about 600,000 barrels per day this year, or about 9%, as gasoline and diesel consumption decline and electric vehicles continue taking market share. If oil stays above $100 long enough, consumers drive less, businesses become more efficient, airlines adjust schedules, and economic activity slows. But that does not necessarily mean demand destruction will prevent higher oil prices. Oil does not need huge demand growth if supply is insufficient. This price discovery is one of the most unknown and hotly debated topics in the commodity market, and I believe it can still be a bullish catalyst for oil.

I am bullish on oil, so how do I play it in the options market? Integrated energy producers and refiners are popular ways to play the bullish trend, including names like ExxonMobil and Chevron, while upstream-focused companies such as ConocoPhillips offer more direct crude exposure. An ETF like USO is another example. Conceptually, structuring a bull call spread on an ETF like this makes sense right now. Instead of buying the call by itself, trading it as a spread means the short call helps finance the long call while still allowing me to participate in what I believe could be a bullish short-term move. It does cap the maximum profit, but it also lowers the risk of exposure if implied volatility collapses after President Trump announces another ceasefire with Iran and oil prices decline. In other words, if my thesis is that oil can move higher, but I also realize volatility is already expensive, I do not necessarily need the unlimited upside of a long call. I may prefer the cheaper, defined-risk way to trade the same market and participate in the bullish move with less uncertainty about the outcome. The specific strikes and expiration would depend on

How long I think the bullish trend might last, my current risk preference, and option pricing at specific strikes.

The big picture is this: I do not think the best way to trade oil is to say oil is going from $100 to $150. That is a difficult call. I think the better way to look at the structural oil market right now is that because of supply disruption and the impact it has already had on existing supply channels, the new floor for oil may be easier to identify than the new ceiling. The options market, and the flexibility of spread trades, gives me the ability to trade that view more effectively than simply trying to predict tomorrow’s price per barrel.