Geopolitical Risk Is Reshaping Oil Trading

The oil market is entering a more defensive phase as traders reassess how much geopolitical exposure they are willing to carry beyond the near term. Brendan Ross, Morgan Stanley’s co-head of global oil trading, said participants are becoming more selective, focusing on specific positions rather than maintaining broad derivatives exposure.

The shift reflects an environment in which the trajectory of energy markets can change rapidly. Developments surrounding the US-Iran conflict, alongside continued fighting between Russia and Ukraine, have repeatedly altered expectations for production, exports and supply security. For traders, committing capital to longer-dated contracts becomes more difficult when the fundamental outlook can change dramatically within weeks.

Liquidity Pressure Builds Further Out the Curve

The retreat from longer-term positions is creating a feedback loop in oil derivatives. With more market participants concentrating activity in the front three to six months, contracts further along the curve are becoming less liquid. Lower liquidity can, in turn, make longer-term positions more expensive or difficult to execute, encouraging even more traders to remain near the front end.

This dynamic matters for both financial markets and physical energy participants. Producers, refiners, airlines and other major consumers often depend on derivatives markets to manage future fuel costs and revenues. When liquidity declines, hedging becomes more challenging and price signals further out the curve can become less reliable.

Refined Products Bear the Brunt of Supply Disruptions

The most significant physical-financial dislocation has emerged in refined products rather than crude itself. Conflicts and disruptions to energy infrastructure and trade have tightened supplies of fuels, producing sharper price movements in markets such as diesel.

US retail diesel prices recently reached a record, while European fuel costs have also surged amid a deepening global shortage. For consumers and businesses, elevated refined-product prices can have a broader inflationary impact because transportation, logistics and industrial operations remain highly dependent on diesel and other fuels.

For investors in both the US and Israel, the distinction between crude and refined products is increasingly important. Even if crude prices stabilize, shortages in refined fuels could continue to pressure transportation costs, corporate margins and inflation expectations.

What the Oil Market Is Pricing Next

The current behavior of traders suggests that risk management, rather than conviction about long-term oil fundamentals, is dominating positioning. As geopolitical uncertainty persists, participants appear more willing to trade immediate supply and demand developments than make large commitments about where prices will be several quarters from now.

That caution could remain a defining feature of the market. If geopolitical tensions ease, liquidity could gradually return to longer-dated contracts. However, renewed disruptions involving major producers or energy infrastructure could produce another sharp repricing, particularly in refined products. For investors, the key signals will be the shape of the oil futures curve, refined-fuel inventories, geopolitical negotiations and the resilience of global energy supply chains.

Closing Insights

Oil traders are not necessarily abandoning the market; they are becoming more selective about where they accept risk. Concentration in shorter-dated contracts reflects a market struggling to establish confidence in the longer-term outlook, while reduced liquidity can itself increase volatility.

The near-term opportunity lies in identifying where physical supply conditions diverge from financial positioning. The principal risk is that another geopolitical shock forces traders to reprice positions across an already thin market, creating outsized moves in crude and refined fuels.

The next phase of the oil market will therefore depend not only on barrels produced and consumed, but also on how much risk traders are willing to hold beyond the immediate horizon. For US and Israeli investors, monitoring liquidity, fuel-market dislocations and geopolitical developments may be as important as tracking the headline price of crude.