Oil options traders are making increasingly bullish bets on how high crude can go, and tensions between Saudi Arabia and Iran are fueling their optimism.
The equivalent of 10 million barrels of Brent crude options -- which would profit most if the global benchmark rises above $90 a barrel by mid-2019, but not above $100 -- traded on Monday and Tuesday combined, according to Bloomberg calculations from ICE Futures Europe data. That follows a series of trades in recent sessions that would be profitable if prices were to rise above $70 and $80 by Christmas.
“It’s hard not to buy deep out-of-the-money calls on the Saudi Arabia-Iran news,” said Richard Fullarton, founder of Matilda Capital Management Ltd., referring to the options to buy Brent at prices far above current levels as tensions flare between the Persian Gulf neighbors and fellow OPEC members.
Crude prices have rallied above $60 a barrel in recent weeks, buoyed by a steadily improving supply-and-demand outlook. More recently, an awakening of Gulf-region political frictions, combined with supply risks in other oil producers such as Iraq and Venezuela, have helped to propel Brent to its highest level in more than two years. Prices slipped a bit Tuesday as the International Energy Agency curbed its demand forecast for next year.
This week isn’t the first time recently that the market has seen such options trades. In September a similar transaction included a bet on oil at $90 a barrel but not at $100 for December 2018. Those trades made the $100 call the most held Brent crude call option for the end of next year. On Friday and Monday combined, a raft of positions that would profit with Brent above $80 and $85 a barrel traded, including $85 calls equivalent to 24 million barrels.
If a Saudi-Iranian conflict were to put shipping at risk in the Straits of Hormuz, then the “premium embedded in oil prices would be easily more than $15-$20 a barrel,” JPMorgan Chase & Co. analysts David Martin and Abhishek Deshpande wrote earlier this week. Such a trade disruption is currently unlikely, though, they said.
— With assistance by Michael Roschnotti