Buyers of Brent crude options this week bet on prices reaching $100 a barrel next year, swamping the market by a historic measure, as demand for oil surged in a fragile economy and turmoil in the Middle East.
Oil trading trends: Highest trading calls
Options for December 2022, the most active contract, reached $87.6 million worth of calls by the close of trading, the highest level on record, industry data compiled by Bloomberg show.
With tensions in the Middle East rising this month, traders were thus buying those options as insurance against any future jump in oil prices.
Commodity Trading Market: Oil dips, gold soars to record highs
A call option gives its owner the right, but not the obligation, to buy those assets at a predetermined price, or ‘strike’, over a preset period.
Oil trading trends: middle east conflicts
Two days prior to Iran’s recent strike on Israel, traders transacted more than 1 million Brent crude call options, including some at the $95 and $100 price levels.
Oil trading trends: price spike in months
These are the least favoured calls, based on contracts, for next year: Brent crude at $90 per barrel.
Prices well above that have been far more popular.
Oil trading trends: price to hit $100?
Data from ICE Futures Europe compiled by Bloomberg show that $100 and $110 call options for Brent crude have been the most popular up to the end of February.
Even the Iranian retaliation, which Israel described as a near-miss, had little effect on the markets: the front-month futures contract for Brent crude sunk below the $90 per barrel threshold on Monday.
Oil trading trends: volatility hits markets
The ever-rising risk factor in the Middle East in recent weeks, along with oil’s relatively muted response this weekend to Iranian drone attacks on Israel, may mean we could see significant trade on call options again shortly.
Despite the high-tense exchanges between Iran and Israel in recent weeks, the tensions, whereby Iran threatened to destroy Israel, have not rampaged oil prices in a bullish direction, Goldman Sachs analysts wrote in a report quoted by FXStreet, a website about foreign exchange.
Goldman, however, could not ignore the influence of the tensions, estimating that ‘lead time of Iranian production would reflect longer contract lengths traded by Iranian sellers to hedge against price risk’.
Oil trading trends: Oil shipping
Apparently, Iran has been hedging in the recent past against a price slide. Only this hedging was not happening via oil shipments but through derivatives.
Trading in today’s crude oil started to decline after an Iranian retaliatory strike against Israel, which Israel said caused minimal damage.
Oil trading trends: Tensions are high
Far from reducing tensions, geopolitical dangers have heightened, as the West seeks diplomatic avenues to de-escalate, even as both Iran and Israel warn of tit-for-tat retaliation over each other’s military moves.
Oil trading trends: Oil supply disruptions
This larger context of contingency has made people nervous about supply disruptions from the Middle East, especially from Iran which, despite sanctions, has boosted production to 3 million barrels a day, the fourth-largest in OPEC.
The two biggest risks to oil supply emerging from this situation, the Dutch bank identified, were 1) US sanctions against Iran broadening after the strike, further curbing Iranian oil output, and 2) Israel hitting Iranian energy infrastructure to retaliate for Soleimani’s killing.
Oil trading trends: Oil prices to rise much higher
ING adds that, while new sanctions would siphon some Iranian supply from the market, dropping bombs on its infrastructure could unleash more dramatic and significant supply shocks: ‘Oil prices could rise much higher, but could also be tempered by the (debated) possibility of new U.S. Strategic Petroleum Reserve releases and OPEC’s spare capacity.’
Goldman Sachs analysts have described the recent Iran versus Israel tensions as ‘unlikely to be a significant bullish driver for oil prices,’ while speculating that the greater likelihood is that oil producers will hedge (sell) their price risk by selling their future production, as per a report by the news site FXStreet last month.
Oil trading trends: Hedge funds selling energy stocks
Hedge funds have been selling US energy stocks for three straight weeks, the bank’s report added, while net sales by funds have occurred in five out of the last six weeks.
That connects with the report last week by Reuters that US energy stocks surged by 17% since the start of the year, ‘making it the biggest winner among a broad swathe of global equities.’
Oil trading trends: Energy sector boom
Surpassing other sectors by far, the energy sector has been doubling the return rate to a stunning 17% YTD return, as Reuters also reported last month.
Such a leap was recorded after oil prices increased by 20%, since the beginning of 2024.
Goldman’s analysts noted that any geopolitical risk premium would be offset by producers hedging their exposure to volatile oil prices by selling forward.
Yet the practice has largely lost its appeal over the past year, with US hedging activity withering after sizeable decreases in 2013.
Oil trading trends: Price rally in the long run
Perhaps producers are starting to realise that, whatever ground they lose in today’s futures market, they could make up over the long run, if not by riding a price rally – which they would have missed out by hedging – then at least by refusing to admit defeat.
Also, as Bloomberg reported last year, the current wave of consolidation in the US oil sector sees less hedging.
Newly integrated oil companies are more likely to use their own operations to hedge against volatility than, say, contractors that focused on locking in prices for upstream production.
In the current geopolitical environment, hedging would likely turn out to be even more perilous.
For example, if Israel were to respond to a nuclear-weapons facility attack with a pre-emptive strike on Iran — one of the Organization of the Petroleum Exporting Countries’ (OPEC) largest producers — oil prices could soar.
If matters escalated further, it could change market realities and send Brent to $100 a barrel or more.
After Iran launched drones at Israel following predawn raids on an Iranian military base in Syria this week, the U.S. House of Representatives will vote on Monday on new sanctions against Iran.
Oil trading trends: Chinese factor
One bill would target imports of Iranian crude oil by China.
Legislation that would place sanctions on the Iran-China trade was passed unanimously by the House Financial Services Committee last November and is now awaiting adoption by the House as a whole.
The Iran-China Energy Sanctions Act of 2023, although not a nuclear agreement, targets the already beleaguered SWIFT financial network.
It contains the word ‘Iran’ in the title and restricts access of US correspondent and payable-through accounts held by Chinese financial institutions that take part in transactions involving imports of Iranian petroleum or petroleum products.
Oil trading trends: Evading sanctions
Moreover, it would extend secondary sanctions beyond the aerospace, shipping, insurance and transportation sectors to all Chinese financial institution dealings with sanctioned Iranian banks that support the sale of petroleum and petroleum products.
The bill would also require the US president to determine annually whether Chinese financial institutions have engaged in sanctionable activity.
The bill itself notes that ‘Iran’s crude oil exports in recent weeks have reached a four-year high of 1.5 million barrels per day, and that 80% of these exports are now going to China’s independent “teapot” refiners.’
Oil trading trends: Drone strikes to hamper exports
Following the recent drone strikes on Israel, many analysts had forecast tightening of sanctions on Iranian oil exports.
While some investment banks and analysts think that it is unlikely that any escalation in the Middle East will occur that could significantly impact oil production and exports, most expect tighter targeting of US sanctions against Iranian oil.
Relative to the price cap, China, which has flouted Western sanctions on Iranian, Russian and Venezuelan oil exports, remains a real buyer of Iranian crude.
When the sanctions on Iran intensify, ING’s analysts forecast that a range of 500,000 to 1 million barrels per day of oil supply will be affected.
Oil trading trends: South Africa’s Eskom woes
Eskom, South Africa’s state-owned utility, is in talks with the government to get $21 billion of public and private cash for building out its power grid to accommodate an expected surge in renewable energy, the company told Bloomberg on Friday.
The utility says it needs $21 billion (c390 billion South African rand) to build nearly 9,000 miles of new power lines over the next decade, which would more than triple the length of transmission lines installed over the last decade.
About 80% of South Africa’s energy is produced from coal, and the country is the world’s fifth-largest coal exporter.
However, South Africa is in the throes of a severe energy crisis; for the past two years, commercial and industrial consumers endure days of scheduled power-cuts, dubbed ‘Days of Darkness’. Eskom has not been able to keep up with the rapidly rising demand of recent years.
Eskom is also in talks with different government departments about financing these projects, ‘crucial for the country’s energy supply’, the company said by email in response to a query from Bloomberg.
Some of the funding will likely be provided by the Just Transition facility, which has been replenished by wealthy nations.
Furthermore, Eskom is also looking to enlist private investment to finance it. The US, UK, France, Germany and the EU have committed $8.5 billion as an initial funding to launch phase one of South Africa’s JET Investment Plan.
The broader programme of cooperation is called Just Energy Transition Partnership (JETP) and was launched in 2021.
And the just transition plan includes investments in job retraining and reskilling programmes, transitions payments for workers who lose their jobs due to the transition away from coal, and re-developments of former coal sites for producing alternatives to coal, like clean energy.
