(Bloomberg) -- Options trading for crude oil this week jumped to the highest in five months as money managers backed OPEC's effort to rebalance the oil market and as regional tensions flared in the Middle East.
Nearly 440,000 options contracts for West Texas Intermediate crude changed hands on Monday, the most since May, as so-called macro funds, which invest in a range of assets, joined a recent surge of money into the oil market.
The global Brent benchmark also saw its heaviest options trading since June, more than 136,000 contracts. In both cases, bullish call volumes vastly outweighed those for bearish puts, data from CME Group's Nymex exchange and the ICE Futures Europe exchange show.
“The near-term call buying is driven by funds,” said Thibaut Remoundos, founder of London-based Commodities Trading Corporation Ltd., which advises on hedging strategies. “Macro buying has been driven by a pickup in economic growth, the tightening of supply on OPEC's success in reining in production, and a proxy hedge for Middle East tensions.”
Both WTI and Brent near-month futures prices reached their highest levels in two years this week amid turbulence in the Middle East. Saudi Arabia, OPEC's biggest producer, arrested officials in an anti-corruption drive over the weekend, a move that may consolidate Crown Prince Mohammed bin Salman's power. A regional conflict between Saudi Arabia and pro-Iranian Yemeni rebels has also intensified in recent days.
The upheaval comes as the Organization of Petroleum Exporting Countries is also preparing for a major meeting on Nov. 30, in which it may agree to extend crude-production cuts beyond their current expiration at the end of March in an effort to end a global oil glut.
Bullish Bets
Hedge funds had already boosted their bullish positions in Brent crude futures and options to record levels last week, according to ICE Futures Europe data. Those for WTI also reached a three-month high, U.S. Commodity Futures Trading Commission data showed on Nov. 3. Following the heightened tensions in the Middle East over the weekend, prices for both benchmarks soared on Monday. Brent was trading at $63.83 a barrel and WTI at $57.10 at 10:49 a.m. in New York.
Growing bullishness in the oil market has been evident in the so-called skew, the difference in demand for call options, or bets that prices will rise, versus demand for puts, which anticipate that prices will fall. The WTI options skew, which usually favors puts, on Monday slipped to its least bearish level in almost eight weeks, while prices for the U.S. benchmark jumped 3.1 percent, the most since late September.
With WTI recently rising for contracts months and years ahead, there's growing incentive for producers to lock in future prices to sell oil, or to buy put options. The average WTI price for 2018 is now more than $56 a barrel, according to Nymex data. This helped to bolster surging trading volumes on Monday, according to Harry Tchilinguirian, head of commodity-markets strategy at BNP Paribas SA in London.
“Current oil prices are inviting a lot of producer hedging and back-end volatility is weakening,” he said. Nonetheless, the bumper option volumes in the nearest-month contracts have “more to do about sentiment and the current geopolitical uncertainty pushing implied volatility” above realized volatility.
--With assistance from Michael Roschnotti and Jessica Summers
To contact the reporter on this story: Alex Longley in London at alongley@bloomberg.net.
To contact the editors responsible for this story: Alaric Nightingale at anightingal1@bloomberg.net, Brian Wingfield, John Deane
©2017 Bloomberg L.P.
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