The oil market is once again trying to balance the risks to supply versus the risks to demand. On the Sunday night reopening, we started off strong in the oil market as OPEC signaled it would keep production cuts in place until the end of the year and the odds of a conflict between the U.S. and Iran seem to be rising.

Yet a wave of risk-off selling pulled oil from its highs as stocks seemed shaky despite a better than expects Japanese GDP number and a stock market rally in India, as exit polls showed Prime Minister Narendra Modi winning the country’s general election, raising hopes for a bump in Indian economic growth. Yet despite oil’s fickle nature, it is clear that the risks are on the upside.

The OPEC plus Russia meeting in Jeddah, Saudi Arabia, led to an agreement to leave the 1.2 million barrels a day production cut until the end of the year but perhaps reign in over compliance. There was a report that Russia was proposing a reduction in cuts to 900,000 barrels a day and that report may have also played into the pullback, yet whatever OPEC ends up doing it will not stop the coming U.S. crude oil supply draws.

Lower Saudi imports and zero Venezuelan oil will cause big U.S. crude draws in the coming weeks as refiners start to come out of maintenance. U.S. oil demand, based on a strong U.S. economy, will exceed expectations. Strong consumer confidence will feed record U.S. gasoline demand and refiners will need to stay ramped up to keep up.

Then you have Iran. Fox News reported that President Trump fired a social media broadside at the Iranian regime Sunday afternoon, vowing that war between Washington and Tehran would result in "the official end of Iran" before warning, "[n]ever threaten the United States again!"

Trump tweeted hours after a rocket landed less than a mile from the U.S. Embassy in Baghdad's heavily fortified Green Zone, the first such attack since September. An Iraqi military spokesman told reporters the rocket appeared to have been fired from east Baghdad, which is home to several Iran-backed Shiite militias.

Fox News says that “Tensions between the U.S. and Iran have risen in recent weeks after the Trump administration ordered warships and bombers to the Middle East earlier this month to counter threatened attacks against U.S. interests by Iran or Iranian-backed forces. The U.S. also ordered nonessential staff out of its diplomatic posts in Iraq days after Secretary of State Mike Pompeo visiting Baghdad told Iraqi intelligence that the United States had been picking up intelligence that Iran is threatening American interests in the Middle East. Two Iraqi officials told the Associated Press that Pompeo had offered no details of the alleged threat.”

The risk is rising of conflict because Iran is starting to believe that the U.S. has no appetite for war. That may be true, but it may cause them to become even more bold. The Iranian Revolutionary Guard leader said,  “The difference between us and them (U.S.) is that they are afraid of war and don’t have the will for it, Major General Hossein Salami said, as quoted by local news agency Fars.”

Yet after Iran continues raising the threats against the U.S., the odds remain high that they will make a miscalculation. In an interview with Fox News broadcast on Sunday, Trump said he was not seeking a conflict with Iran, but he also vowed not to let it develop nuclear weapons.  "I'm not somebody that wants to go into war, because war hurts economies, war kills people most importantly – by far most importantly," the president said.

While geopolitical risks are rising, will we start to see oil supply falling? Look for a big 4-million-barrel drop in U.S. crude supply. We will also see modest drops in products with gasoline down 2 million and distillates down 1 million barrels.

To position, it is important to use futures hedged with options as we could be on the verge of some major price movements. We expect to see oil volatility start to rise. For refiners, it will be a race to the finish line to get supply pumped up ahead of the Memorial Day weekend. You had better get buckled up because, for oil, we are going to go on a wild ride. Better get ready to embrace the volatility.