Bets oil will hit $100 a barrel surge on fears of wider Middle Eastern war

By Myra P. Saefong

Short-dated call options are an 'inexpensive way to play a worst-case scenario' for oil

Options traders are making bullish bets that oil could soon hit $100 a barrel on fears tensions between Israel and Iran could spark a wider Middle Eastern conflict that threatens crude flows

On Thursday, November $100 call options saw the highest open interest on record at 18,628 contracts, according to FactSet data provided by Dow Jones Market Data. December $100 call options saw the highest open interest day this week on Wednesday, at 41,424 contracts. That was the highest since Sept. 20 of this year.

Call options are contracts that give holders the right, but not the obligation, to buy, in this case, an oil futures contract at a set price by a set time. Put options give the holder the right to sell.

Under most circumstances, call options with a strike price of $100 or higher represent the action of the "lunatic fringe," Tom Kloza, global head of energy analysis at OPIS, a subsidiary of MarketWatch publisher Dow Jones.

The bets for higher prices on the options market, however, have come as futures prices of crude oil have climbed to their highest since late August. November West Texas Intermediate crude (CL.1) (CLX24) rose 9.1% this week to close at $74.38 on Friday. Global benchmark Brent crude for December delivery (BRN00) (BRNZ24) rose 9.1% to $78.05 a barrel on ICE Futures Europe.

"With tensions near a boiling point in the Middle East, traders weigh in on the ramifications of both a strike on Iranian oil infrastructure," as well as what could happen if Iran shuts down the Strait of Hormuz, said Phillip Streible, chief market strategist at Blue Line Futures. "That has caused both hedgers and speculators to gravitate towards an inexpensive way to play a worst-case scenario" of $100-plus per barrel crude oil through short-dated call options."

Read: Israeli strikes on Iran's 'oil island' could send crude prices soaring

Streible provided data from the CME Group's (CME) Globex exchange showing November $100 crude call options with an open interest volume of 18,682, as of late morning Friday.

For a short-dated call, that is "far out of the money," said Phil Flynn, senior market analyst at The Price Futures Group. Far out of the money means that the strike price of the option is a lot higher than the current market price.

Bets for $100 a barrel crude are going up for both WTI and global benchmark Brent crude "because of the most significant risk to Middle Eastern oil supplies in decades," said Flynn.

But just because we're seeing much more volume in far out-of-the-money calls, it "does not necessarily mean that traders believe that the prices have to achieve $100 a barrel to make significant profits," he said. Most of these traders are betting on a price spike where they will see the increase of the value of their options - where they can take a "quick profit."

Still, there's been a significant increase in the oil volatility, with the Cboe Crude Oil Volatility index XX:OVX hitting the highest level since March 2023, he said, so options are not as cheap as they would have been just a few days ago.

'Anyone with a grasp of statistical probability puts just a tiny affirmative percentage on a Strait of Hormuz impasse and the high prices that might come with it.'Tom Kloza, OPIS

For the moment, the $100 call options are "appealing to companies looking to hedge price risk tied to another fuel apocalypse similar to the Ukraine war," OPIS's Kloza told MarketWatch. But "it is a huge leap from 'Apocalypse Maybe' to 'Apocalypse Now'."

He said he "wouldn't be surprised to see lots of options action in $50 or $60 a barrel calls a few months from now, "although betting on those prices, at the moment, is limited to lunatic fringe speculation."

"Nothing moves the needle in market participation like Middle Eastern fear," said Kloza. However, "anyone with a grasp of statistical probability puts just a tiny affirmative percentage on a Strait of Hormuz impasse and the high prices that might come with it."

-Myra P. Saefong

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10-04-24 1521ET

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