The U.S. Treasury Department is considering a rare and possibly unprecedented move: direct intervention in the crude oil futures market to suppress the surge in oil prices caused by the Iran conflict.

Unlike previous use of strategic petroleum reserves (i.e., "selling oil"), the idea this time is to influence price expectations through financial market means, such as restricting speculation, adjusting trading rules, or joining forces with other institutions to enter the market to stabilize the market - the exact method has not yet been announced.

According to reports, the Treasury Department may announce a package of measures to deal with rising energy prices, including direct intervention in the oil futures market. However, as the plan is still being finalized, the official declined to disclose details in advance so as not to interfere with the official release.

This urgent action was triggered by a sharp surge in oil prices: since the US-Israel attack on Iran, the market has been worried about the disruption of crude oil supply in the Middle East, and the price of US crude oil futures has soared nearly 21% in a week, leading to a rapid rise in fuel costs such as gasoline and diesel, reigniting concerns about a rebound in inflation.

To put it simply, the government may no longer just "sell oil", but "manage the market" - using financial means to put the brakes on out-of-control oil prices.

U.S. Treasury Secretary Besant may be going to "return to his old business"

This time, instead of placing an order with a hedge fund, it intervened in the oil futures market on behalf of the government.

Why him?

Bescent is not a traditional politician. He was the chief investment officer of Soros Fund in his early years and later founded his own macro hedge fund Key Square Group, which has decades of experience in currency, bond and commodity trading, and is well versed in financial market operations. Now, he is bringing this experience to the Treasury.

How to do it?

According to Phil Flynn, senior analyst at Price Futures Group, the Treasury Department may adopt a "out-of-the-box" operation: "sell near-month crude oil futures while buying far-month contracts." This strategy can directly lower the price of oil (front-month contracts) that are about to be delivered, alleviate market panic and send a signal that "supply is not so tight".

But Flynn also emphasized that this is a completely new way of playing - the Treasury Department used to only issue bonds, manage exchange rates, and occasionally intervene in foreign exchange, and never touched commodity markets such as oil.

Is there a precedent? A bit like it, but not exactly the same

Although it is the first time that the U.S. government has directly intervened in oil futures, it is not without a history of the U.S. government's use of financial instruments to "bail out the market": in the 2008 financial crisis, the Federal Reserve bought Treasury bonds and mortgage bonds (i.e., "quantitative easing"); The Foreign Exchange Stabilization Fund (ESF), the Treasury's "secret weapon," was established during the Great Depression and currently exceeds $220 billion. It provided financial support to the Federal Reserve in 2008, the 2020 pandemic, and the 2023 banking crisis.

In addition, Mexico has been locking in oil revenues for years with the "Treasury Department Hedging" program - the world's largest oil financial hedging operation. But the key difference is that Mexico is hedging its own exports of physical crude oil, while the United States wants to intervene in pure financial market prices this time, not actual oil trading.

Market sentiment intensifies: Hedging trades hit records

Just as Washington is considering intervening in oil prices, the crude oil derivatives market is already "frying" - trading is at a frenzied level.

Driven by the conflict in the Middle East, WTI crude oil futures are on track to post their biggest weekly gain since March 2022. In the face of violent fluctuations, oil producers and consumers alike are acting frantically, for fear of missing out or suffering.

Manufacturers: Hurry up and "lock profits"!

U.S. oil companies are seizing this wave of high prices and selling future oil in advance through forward contracts to lock in profits; According to Energy Aspects data, the hedging trading volume on a given day hit a record high since 2023; A large number of forward contracts have been sold off, resulting in a "serious spot premium" in the futures price structure - simply put, selling oil now is much more expensive than in the future, for example, the spread between the June and December contracts soared from $1.48 to $8.21 in just two weeks!

In order to save money and guarantee the bottom, many producers also use the "collar strategy" to buy put options: to ensure that there is a guaranteed reserve price when oil prices fall; Sell a call option: Earn some premium to offset some of the costs.

Consumers: If you don't avoid risks, it's too late!

On the other hand, large oil users (such as airlines) can't sit still. Rob McLeod, head of energy risk at Hartree Partners, bluntly said on LinkedIn: "Companies that used to think hedging was 'too expensive' or 'too complicated' should wake up this week - hoping for luck and oil prices not to rise is not a strategy at all!" ”

Don't bet on policies, but prevent fluctuations

The market has entered a state of emergency of "grabbing windows and preventing risks" - oil sellers are afraid of falling, oil buyers are afraid of rising, and everyone is desperately using financial tools to protect themselves.

For crude oil bulls: short-term wary of technical pullbacks brought about by the intervention of the Ministry of Finance (especially front-month contracts); But if geopolitical risks are not resolved, the pullback is an opportunity to increase positions - fundamental support is still there.

For energy stocks/ETF investors: Upstream oil companies (such as Exxon, CNOOC) benefit from high oil prices, but volatility increases; refining and aviation are under pressure, and you can consider buying crude oil put options to hedge costs; Follow the spread arbitrage opportunities between the SPDR Oil & Gas ETF (XOP) and the USO Crude Oil Fund.

If the Ministry of Finance really takes action, the near-to-far monthly spreads may converge quickly, and the inverse calendar spreads can be laid out, but strict stops must be set - the risk of policy intervention failure is extremely high. If the conflict escalates, any financial operation will be invalid, and in extreme markets, the futures market may have "no market".