The recent drama in the Middle East has left oil traders scrambling for cover, with the US escorting a tanker through the Strait of Hormuz and Iran’s threats of retaliation. The market has reacted with a knee-jerk response, with oil prices surging on Sunday night only to plummet today. But is this overreaction justified? And what are the geopolitical risks at play here?

Firstly, let’s take a closer look at the logistics of escorting tankers through the Strait of Hormuz. As one veteran trader pointed out, there aren’t enough ships in the world to escort every ship required to cross the strait, let alone release a 20MMb/d blockade. One VLCC (very large crude carrier) can carry up to 2MM barrels of oil, but there are only so many of these vessels available for hire. It’s simply not feasible to escort every ship through the strait, especially when you consider the risks involved.

But let’s assume for a moment that Iran were to strike just one tanker or US navy ship with a hypersonic missile. The market reaction would be catastrophic, with oil prices surging on fears of a wider conflict in the region. And herein lies the crux of the matter: geopolitical risks.

The Strait of Hormuz is one of the most critical shipping lanes in the world, carrying around 20% of the world’s oil supply. Any disruption to this flow could have severe consequences for global energy markets. And while Iran has threatened to blockade the strait in the past, the US escorting a tanker through the area is a clear signal that they are not going to let Iran get away with such actions without a fight.

So what does this mean for oil traders and investors? It means that the market may continue to overreact to any perceived geopolitical risks in the region, leading to further price volatility. But it also means that there are opportunities for savvy traders to profit from these swings, whether through hedging strategies or simply buying and holding onto quality assets.