Oil Traders Flock to Options Like Never Before on Mideast Risk

(Bloomberg) -- Oil traders are holding a record number of options contracts as they seek to protect against the risk of a price spike driven by potential supply disruptions in the Middle East. 

Brent options open interest this week topped 4 million contracts for the first time — the equivalent of four billion barrels. The total number of positions held by traders has jumped by more than 25% so far this month. 

The surge in activity reflects the way traders are hedging against heightened risk of disruption in a region that accounts for about a third of the world’s oil supply, while views on the outlook for the market into 2025 are bearish. Israel has said it will retaliate for a missile attack by Iran earlier this month, while launching strikes against Tehran-backed proxies in Lebanon. 

There’s also some uncertainty over the impact the US election may have on policies toward OPEC+ members Russia and Iran. 

“There is a prevalent view that betting on the movement of oil prices is much less risky by using options than outright futures contracts,” said Tamas Varga, an analyst at brokerage PVM. “The uncertainty surrounding our market, precipitated by geopolitics in the Middle East and in Ukraine, by the upcoming US elections, and by the massively diverging views on future oil demand all lead to volatile trading conditions and ‘headline trading’.”

The protection against a spike also shows up in the way the oil market is pricing options contracts. Nearby Brent call options are fetching the biggest premium to bearish puts since March 2022, shortly after Russia invaded Ukraine. 

Those premiums extend for months ahead, suggesting traders are currently pricing a prolonged threat to supplies. 

“The market does put a probability of something happening in the middle east, but that is happening in the option markets,” Jeff Currie, chief strategy officer of energy pathways at Carlyle Group said at the FT Energy Transition Summit in London on Wednesday.

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