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NEW YORK / LONDON (Reuters) – Oil traders have been betting that US crude oil could hit $ 100 a barrel by next year, a milestone that until recently many judged unthinkable because of record growth in US production and relatively stable global demand.
FILE PHOTO: Crude oil is poured from a bottle on this illustration photo from June 1, 2017. REUTERS / Thomas White / Illustration / Photo File
But the imminent return of US sanctions to Iran and bottlenecks preventing US oil from entering the market fueled a recovery that pushed oil prices to their highest level in four years.
While major producing nations believe supply is plentiful, hedge funds and speculators are increasingly skeptical of this argument. Betting on the market could pick itself up following the return of sanctions on Iran's crude exports on Nov. 4.
The uptrend is visible in the US options market. The number of open positions on WTI CL1000L9 purchase options of $ 100 in December 2019 – the bets on futures reaching this price at the end of 2019 – rose by 30% last week to reach a record 31,000 lots, according to CME data.
"In the last two weeks, it has become increasingly clear that even some of the biggest customers – India and China – will not buy Iranian crude from November," said John Saucer. , Vice President of Research and Analysis at Mobius Risk. Group.
As a result, he said, "these sanctions will probably be much more effective than we thought".
Iran's total exports fell from 2.8 million bpd in April to 2 million barrels per day (bpd) in September, the Institute of International Finance announced.
It is estimated that the share of Iranian exports that can be allocated ranges from 500,000 to 2 million bpd, and the uncertainty surrounding the impact could ultimately favor two-way price fluctuations.
Brent, an international benchmark, surpassed $ 86 a barrel on Wednesday, and US crude West Texas Intermediate (WTI) hit $ 76 a barrel, its highest level in four years.
The Trump administration's decision to renew sanctions against Iran has caused a radical change on the part of the Organization of the Petroleum Exporting Countries. After about 18 months of restricted supply, OPEC agreed to increase production.
In addition, Saudi Arabia and Russia have recently agreed to strengthen supply before telling other OPEC countries to calm US President Donald Trump, who has focused his anger on rising prices. .
Oil markets rely on OPEC and Russia to fill their supply gaps. US production, which peaks at 11.1 million bpd, can not replace Middle East crude, such as Iranian grades, in Asian refineries. In addition, bottlenecks in the transportation sector limit production in the United States.
"We continue to see price risks going down and not excluding a surge in oil prices to $ 100 a barrel," said UBS analyst Giovanni Staunovo. .
Interest on Brent's $ 100 buying options as of December 2018 LCO10000L8, which expires at the end of October, currently represents more than 50,000 lots, more than any other strike price. months, according to InterContinental Exchange data.
(For a chart on "Traders bet on 100 US dollars of oil in the approach of sanctions against Iran," click on reut.rs/2Oy7mvY)
The implied volatility of Brent's very bullish options, which expires after sanctions resumed on Nov. 4, outpaced that of very bearish options, suggesting increased demand for such bullish bets.
This gap, or bias, is at its highest since mid-July.
Open Interest of $ 100 in December 2018 The CLI WL1000L8's calls, which expire in mid-November, reached their highest level in more than four months with approximately 15,000 lots.
Many traders have said that these $ 100 bets are facing long odds. Option contracts used to speculate on wacky results tend to be cheap and if the rally stagnates, these positions will expire worthless. But even a short-term jump could make these options more expensive, and the holders could sell them at a profit.
Report by Devika Krishna Kumar in New York and Amanda Cooper in London; Edited by Cynthia Osterman
