The price of oil prompts traders to bet on further declines

Monday’s drop, the largest in oil since September, halted a relentless surge that had pushed prices to multi-year highs, raising drivers’ gas bills and leading Washington to encourage Middle Eastern producers to pump more of crude. Some investors were betting that a combination of limited supply and booming demand would push oil above $ 100 a barrel for the first time since 2014.

Behind the explosion of volatility lies the realization that vaccines will not prevent episodic outbreaks of infection and the introduction of measures to control new variants, according to Marwan Younes, chief investment officer at Massar Capital Management, a commodity-focused hedge fund.

“It’s going to be a lot more rowdy than people expected,” he said.

Mr. Younes is positioning himself for crude prices to fall further, but not drastically. He sees crude settling in a range of between $ 60 and $ 65 a barrel.

Investors say the transmissibility of the Delta variant, even in countries like the UK and Israel where vaccinations are prevalent, raises the prospect of further restrictions on economic activity, especially in energy-intensive Asian countries with high rates. lower vaccination rates.

While few fund managers expect a return to 2020-type closures in the US or Europe, they say consumer cautiousness or limitations on international travel could dampen the recovery in demand. Global oil consumption has skyrocketed as major economies lifted lockdowns, but it is not expected to reach pre-pandemic levels until the end of 2022, according to the International Energy Agency.

Meanwhile, the Organization of the Petroleum Exporting Countries and its allies, including Russia, are preparing to release millions of barrels of bottled crude. A possible increase in Iranian crude exports in the event of a nuclear deal with Washington is another factor leading investors to downgrade expectations of further oil gains.

A sign that traders believe the period of several months of steady gains for oil is over can be found in the options market. Options are contracts that allow investors, producers and traders to speculate on price changes and protect against a commission.

A gauge of how well traders anticipate WTI futures price movements over the next 30 days, known as implied and derivative option price volatility, jumped to 41.2% on Monday. This marked its highest level since April 5, according to QuikStrike, although it was well below the peak of 345% recorded in April 2020, when global shutdowns pushed crude prices below zero.

Another options indicator suggests traders are paying more to protect against price drops. The risk reversals on US crude options measure the difference between what traders pay for bullish WTI calls and bearish puts. On Monday, they fell to minus 13.7 percentage points, the lowest since early April.

The sharp moves in option prices rewarded market participants who bought a large number of sell contracts last week, said Bob Yawger, director of energy futures at Mizuho Securities USA. On July 12 and 13, put options with the unusual strike price of $ 66 a barrel traded in high volumes, he said, a sign that some traders were preparing for a pullback from crude.

“Whoever it is, he gets the old pat on the back today from his boss,” Yawger said Monday.

The options market dynamics likely contributed to the violent movements in the underlying price of oil, said Scott Shelton, analyst and broker at United ICAP. Dealers who had sold put options suffered heavy losses when crude futures began to fall on Monday. At this point, they had two choices: buy back the contracts to cut their losses as their prices skyrocket, or sell WTI futures as hedge. Many have likely chosen the second option, adding to the selling pressure on crude, Shelton said.

To be sure, Mr. Shelton and many others remain optimistic about the outlook for oil prices. Goldman Sachs Group analysts say the additional barrels of oil promised by OPEC will not be enough to bridge the gap between production and recovering demand. They see Brent, the world benchmark, trading at an average of $ 80 a barrel in the fourth quarter, although they warn of the risk that prices “turn wildly in the weeks to come.”

Others, however, believe the rally in oil prices is facing a test. Real-time measures of the economy such as traffic levels, for example, show demand has stagnated in countries like the UK, Indonesia and Brazil.

Longer term, the recent standoff between the UAE and Saudi Arabia suggests that Middle Eastern producers will look to pump as much crude as possible before climate change efforts cause the economy to dry up. request, said Vincent Elbhar, co-founder of hedge fund GZC Investment. Management.

Write to Joe Wallace at [email protected]