Against the backdrop of escalating tensions in the Middle East, international oil prices have continued to soar over the past week. Although the global benchmark Brent crude oil has only just broken through the $80 mark, many options traders are already preparing for oil prices to break through the $100 mark.
According to FactSet data, as oil prices surged by about 9% in a single week last week, traders in the oil options market have shown record interest in call options betting on oil prices rising to $100 per barrel next month.
Last Thursday, the number of open contracts for $100 call options expiring in November on the Chicago Board Options Exchange reached a historic high of 18628. The number of open contracts for $100 call options expiring in December also reached 41424, the highest level since September 20th.
These call options give traders the right to purchase oil futures contracts at that price, although they are not obligated to buy contracts.
Previously, Iran launched a large-scale missile attack on Israel last week, and the Israeli government vowed to retaliate against it. At the same time, on the one-year anniversary of the outbreak of a new round of Israeli Palestinian conflict, armed groups from the Palestinian Islamic Resistance Movement (Hamas), Yemeni Houthis, and Lebanese Hezbollah launched rocket and missile attacks on Israel on Monday. Israel continues to launch attacks on the northern border of Gaza and Lebanon.
Phil Flynn, Senior Account Manager and Market Analyst at Price Futures Group, said, "We saw the largest jump in oil price volatility in over two years last week. Prior to this, the crude oil market seemed to be an 'immune' market to geopolitical risk factors - people ignored these geopolitical factors, and hedge funds repeatedly pushed down oil prices. But now, this is a warning bell because geopolitical risk is becoming a reality
Many traders are currently concerned that energy infrastructure in the Middle East, especially in Iran, may be attacked, hindering oil supply or causing disruptions in the Strait of Hormuz. US President Biden said last Thursday that Israel had discussed attacking Iranian oil facilities in retaliation for Iran's missile launch into Israel last week. He later suggested that Israel should consider other options.
Iran currently exports approximately 1.7 million barrels of crude oil per day, mainly from a dock on Hag Island, located about 25 kilometers off the southern coast of the country.
Flynn pointed out that this could potentially disrupt the supply of a major oil producing country, which would be even more difficult to replace. He explained, "If we do see Iran's oil exports being significantly cut off for some reason, then the world will be plunged into what may be one of the most tense supply and demand situations in decades
He added, "This could lead to a significant surge in oil prices, causing problems not only for the global economy, but also for the Federal Reserve, as it needs to seek a balance between the impact of the oil price surge on the economy (economic slowdown and potential new inflationary pressures from the oil price surge)
Traders should quickly adjust their positions
There are indications that many hedge funds had previously been betting that oil prices would continue their downward trend this year, but now they have begun to adjust their positions. According to data from Intercontinental Exchange (ICE), fund managers reduced their large short positions in Brent crude oil and increased their long positions during the week ending October 1st (in the early stages of last week's oil price rise).
Flynn stated that the escalating geopolitical tensions have led energy market traders to increasingly hedge against the prospect of oil prices soaring to $100 per barrel.
I think $100 per barrel is the worst-case scenario in the short term. But that doesn't mean there isn't a lot of trading capital in these options to hedge against this worst-case scenario, "he pointed out. In fact, if you look at the number of options priced above $100 per barrel, for many reasons, their quantity is three times that of normal circumstances. Flynn explained, 'There are many people who are bearish on this market and are paying hedging costs for the worst-case scenario.'.
When talking about these $100 call options, Flynn said, "Although these options may not seem cost-effective at the moment, if oil prices skyrocket significantly, your investment can double or triple in this situation. If that doesn't happen, then your risk is basically limited to the fees you pay for the options
A recent report from Goldman Sachs also stated that if Brent crude oil and West Texas Intermediate crude oil prices rise significantly, algorithm driven traders known as Commodity Trading Advisors (CTAs) may release up to $40 billion in buying orders.
Goldman Sachs analysts pointed out that if Iran's oil supply is affected, Brent crude oil prices may reach $90 per barrel or higher, and the specific price impact depends on whether other OPEC member countries increase production to compensate. If Iran's daily supply of oil decreases by 1 million barrels (such as due to increased enforcement of sanctions), Brent crude oil prices may rise to around $85 if OPEC takes action to make up for the supply gap, while in the absence of measures, Brent crude oil prices will peak at around $95.
On Monday of this week, Brent crude oil futures prices rose 3.7% to $80.93 per barrel, while US WTI crude oil futures prices rose 3.7% to $77.14 per barrel. Last week, both benchmark crude oils rose by 9.1%.
David Oxley, Chief Climate and Commodities Economist at Capital Economics, also stated in a report that the risk of supply disruptions has increased following Iran's missile attack on Israel last week.
He pointed out, "The biggest risk is the escalation of the situation in a tit for tat manner, ultimately leading to the interruption of shipping in the Strait of Hormuz. The risk premium will dominate in the short term; based on the development of the situation, it can be imagined that oil prices will rise by another $20 per barrel