Oil Betting Strongest in Two Years as Conflict Flares

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(Bloomberg) — Oil futures posted their largest gain in more than a year last week. And the frenzy was even bigger in the options market.

As traders fretted over the risk of a major price spike, the call skew on second-month West Texas Intermediate futures jumped to the highest since March 2022, when Russia’s invasion of Ukraine sparked concerns that millions of barrels a day of oil from one of the world’s top producers would suddenly disappear from the market. 

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In a surprise move, hedge funds, trade advisers and other money managers rushed to reverse positions that in mid-September turned green on concerns that slow economic growth in China and elsewhere will reduce demand as OPEC+ producers prepare to boost supply. About two weeks ago, put volume up, traders paid bearish options as futures fell to $70 a barrel.

But the expansion in the Middle East changed everything. While some traders are exiting the calls they had previously sold, most of them are looking to buy insurance against rising prices.

“We have seen a large bid for volatility and a growing demand for exposure to oil prices,” said Anurag Maheshwari, head of oil options at Optiver. The implied volatility exceeded the highest level since October of last year, “which seems reasonable given that this increase has a significant impact on oil availability.”

Last week, traders called December asking for Brent crude oil to reach $100 or more, with the total number of calls hitting a record on Wednesday. WTI futures rose as much as 11% amid concerns that Israel could hit oil facilities in retaliation for Iran’s missile attack, raising fears of supply disruptions in the Middle East. Concerns eased slightly on Friday as US President Joe Biden sought to discourage the move.

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Money managers’ long positions in Brent crude jumped by more than 20,000 contracts in the week to Oct. 1, according to data from ICE Futures Europe, extending a shift that began in earnest after China announced a massive economic stimulus package.

“Options traders have given up on the rally view, leaving implied volatility in oil call options near multi-year lows,” said Carley Garner, chief strategist and founder of DeCarley Trading. “Actually, the market wasn’t ready to be surprised, and we’re seeing FOMO now that prices are finally moving in line with the bulls.”

Along with crude prices, traders also found outside bets on the futures curve system converging more. More than 5 million barrels bet in the nearby area of ​​Brent hit $ 3 a barrel sold last week – it was 62 cents on Friday.

The pressure on the market was most evident in short-term contracts, with the 25-delta options term structure showing that bullish trading has increased in recent days. December’s implied volatility increased by more than 30 points last week, more than tripling the put, while there was almost no change in bullish or bearish positions on July contracts and forward.

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Commodity strength – both in Brent and WTI – has outstripped that of producers, who are likely to see gains only if prices stay high for longer. Volatility and call skew in one-month options on the US Oil Fund LP exchange-traded fund both rose above the SPDR S&P Oil & Gas Exploration & Production ETF.

“The surge in the Middle East has created a significant amount of crude oil coverage as CTAs have shifted from short to neutral,” said Rebecca Babin, senior equity trader at CIBC Private Wealth Group. “Investors in basic energy remain sour on 2025 and are using call options instead of chasing a rally to gain exposure to potential disruptions.”

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