Assessing risks to oil prices through options markets

KUALA LUMPUR, 26 JULY 2026 —

Options markets indicated investors expected oil prices to rise more sharply than futures delivered after the Strait of Hormuz closure in late February 2026, according to a Bank of Canada analysis released on Monday.

The closure, a critical oil-shipping chokepoint, disrupted global crude flows and pushed gasoline prices higher within weeks. While futures markets reflected the supply shock, options on those futures revealed how investors hedged against extreme risks, the Bank said.

In the immediate aftermath, one-month Brent call option prices implied a distribution skewed toward higher oil prices than the eventual futures settlement. The skew peaked in March and April, then faded by late June as tanker traffic resumed. The one-year Brent futures curve remained broadly stable, suggesting investors viewed the disruption as temporary.

“The options-implied distribution showed extreme near-term concern, concentrated in the first month and easing as time passed,” the Bank said. The shift tracked the strait closure’s evolving impact on supply and the gradual return to normal shipping conditions.

The disruption’s ripple effects extended beyond oil. Sovereign bond yields and inflation swaps, both sensitive to energy-price pass-through, rose in tandem. The correlation points to a shared driver: the risk of a prolonged supply squeeze lifting inflation and tightening monetary policy.

Policy makers monitor oil-price risks because crude is a key driver of inflation. Options provide insight not just into the average expected price but the full range of plausible outcomes and whether risks are skewed toward higher or lower prices, the Bank said.

The Bank’s analysis highlights how derivatives act as an early-warning system during geopolitical shocks. By quantifying where investors buy protection, policy makers gain clarity on the balance of risks around inflation, especially when traditional models struggle.