Call options surge as $100 oil looms amid Middle East tensions
On Wednesday, there was a notable rise in interest in call options on the oil market that will be profitable if crude oil prices hit $100 per barrel. This trend reflects increasing investor concerns over potential supply disruptions in the Middle East.
3 October 2024 10:01
Oil prices are climbing, deepening a trend that began earlier in the week. Analysts cited by Bloomberg view this as a move to hedge against the risk of sharp price increases in the near future.
By 11:20 AM Eastern Time, the trading volume of December Brent crude options with a strike price of $100 reached the equivalent of almost 27 million barrels. At the same time, options on U.S. WTI crude with similar parameters saw a volume equivalent to over 7 million barrels. According to market experts, these transactions included both buying and selling options. This return mirrors the situation in April, when tensions in the Middle East heightened analysts' concerns about a sharp rise in oil prices.
$100 per barrel on the horizon?
Scott Shelton, an energy specialist at TP ICAP Group Plc, has no doubt that investors are taking the issue of rising oil prices more seriously. He believes that options with a $100 price act somewhat like insurance policies for investors who hope they will become worthless. Shelton emphasizes that while the probability of a significant production drop is low, the geopolitical context makes clear predictions difficult. He adds that the fundamental supply and demand balances remain generally weak.
On Tuesday, Brent crude oil saw the largest daily price volatility since March last year. This was a direct reaction to Iran's missile attack on Israel and the subsequent announcement of retaliation from Tel Aviv. These events caused substantial turmoil in the oil market, which had been characterized by a large number of short positions in previous weeks.
Rise in option value and market outlook
The growing interest in bullish call options has led to a sharp increase in their value. The value of WTI and Brent crude options with a $100 strike price reached the highest level since mid-August. However, analysts caution that this bullish position in the options market contrasts with fundamental market conditions, which suggest a probable oversupply in the months ahead.
The current state of the oil market reflects the complexity of factors influencing oil prices. On one hand, investors are hedging against potential supply shocks stemming from geopolitical tensions. On the other hand, fundamental market indicators suggest the possibility of oversupply in the future. This juxtaposition highlights the challenges faced by oil market participants in today's unstable global environment.