Geopolitical tensions are intensifying with the broadly muted oil prices signalling that the market is likely expecting the current war with Iran to resolve quickly with limited effect on broader oil price levels. Although trump is believed to want to avoid direct conflict due to upcoming mid-term elections, his strong rhetorical aggression against Iran, the undeniable influence of the Israeli lobby in the US, and past history of the US interventions leading to regime changes in the Middle East, highlight a rising right-tail risk for oil.
Although playing the upside via the SXEP would be the obvious path, we still see asymmetric risk-reward in BP, the highest Beta name amongst European oil majors, given its weaker balance sheet and its strategic shift away from renewables back into its core hydrocarbon business, making it the most susceptible to benefit from higher oil prices. Similar to the majority of oils breaking to all-time highs we expect BP to break current resistance and choose to play the upside via Long Jun26 520 Calls costing 3% of underlying. (Spot ref 469.7, Fwd ref 469.3)