- 2024-07-14
- News
Middle East Tensions: Oil Traders Flood Options Market
Brent crude oil options open interest has record-breakingly surpassed 4 million contracts, increasing by more than 25% so far this month.
Oil traders are holding a record number of options contracts to guard against the risk of price spikes due to potential supply disruptions in the Middle East.
This week, Brent crude oil options open interest broke through 4 million contracts for the first time, equivalent to 4 billion barrels. So far this month, the total number of positions held by traders has jumped by more than 25%.
The surge in oil options trading activity reflects that traders are hedging against the risk of disruptions to oil supplies from the Middle East, which accounts for about one-third of the world's oil supply, while also holding a pessimistic view of the market outlook for 2025.
Israel has already indicated that it will retaliate against the missile attack launched by Iran earlier this month, while also launching a ground offensive against Iran-backed Hezbollah in Lebanon.
In addition, there is also some uncertainty about the potential impact of policies from OPEC+ member countries Russia and Iran.
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Tamas Varga, an analyst at oil brokerage PVM, said, "There is a widespread view that betting on the direction of oil prices using options is much less risky than direct futures contracts. Geopolitics in the Middle East and Ukraine, as well as significant divergences in future oil demand, have led to a volatile trading environment and market trends swayed by various headlines."
Measures to guard against oil price spikes are also reflected in the way the oil market prices options contracts. The premium of near-month Brent crude oil call options over put options is reaching the highest level since March 2022. Options contracts are also betting that the premium will continue in the coming months, indicating that traders currently expect supplies to face long-term threats.
Jeff Currie, Chief Strategy Officer of Carlyle Group's Energy Path, said at the FT Energy Transition Summit held in London on Wednesday, "The market does indeed believe that something could happen in the Middle East, and this situation is being digested in the options market."
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