The prospect of oil topping $150 a barrel within a year has become the biggest bet in the options market as the U.S. and Europe work to limit Iran’s crude sales.
The number of outstanding calls to buy oil at $150 next December has jumped 29 percent since a Nov. 8 United Nations inspectors’ report on the Persian Gulf country’s nuclear program, to more than any other option on the New York Mercantile Exchange. The contracts equate to about 38 million barrels of oil, or 43 percent of daily global demand, based on data from the U.S. Energy Department.
“People are taking a long shot and buying cheap insurance,” Fred Rigolini, vice president of Paramount Options Inc. in New York, who has traded crude options for 23 years, said in a telephone interview on Dec. 5. “They’ll probably play this through the spring.”
The price of the $150 calls has risen 7.6 percent to $1.30 since the day before the UN report was published, outpacing the 3 percent gain in oil futures. Crude will surpass $250 a barrel if nations threaten to ban purchases from Iran, the Tehran-based Shargh newspaper cited Ramin Mehmanparast, an Iranian foreign ministry spokesman, as saying Dec. 4. Iran is OPEC’s second-biggest producer.
Open interest, the number of contracts not closed or delivered, in options to buy crude at $150 next December increased 11 percent on Nov. 22 alone as the U.S., U.K. and Canada imposed new sanctions on Iran’s financial system, including measures that may make it more difficult for buyers to pay for Iranian crude.
Outstanding options numbered 38,023 yesterday, data from the Nymex show. The second-largest open interest was 35,453 puts, or bets to sell oil, for $80 in December 2012.
“The rise in open interest in deep out-of-the-money calls reflects investors looking to either profit from an oil price spike or to protect the rest of their portfolio if things do take a turn for the worse,” Seth M. Kleinman, European head of energy research at Citigroup Inc. in London, said in an e-mailed report on Dec. 6.
A European ban on Iran’s exports still may not boost prices because the Islamic republic’s remaining trading partners, including China and India, would have increased power to negotiate discounts, depriving the country of cash while leaving world supplies little changed, Mark Dubowitz, director of the Iran Energy Project at the Foundation for Defense of Democracies, a policy group in Washington that supports sanctions, said in a telephone interview last week.
The U.S. Senate unanimously approved a measure on Dec. 1 that, if enacted into law, ramps up sanctions against Iran’s central bank and will increase financial obstacles to buying the country’s crude. The Obama administration opposed the legislation because it may drive oil costs higher.
West Texas Intermediate oil, the U.S. benchmark contract for crude delivered to Cushing, Oklahoma, advanced to a 31-month high of $113.93 a barrel in April after uprisings toppled leaders in Tunisia and Egypt and fighting to oust Muammar Qaddafi erupted in Libya, disrupting exports from a country that is home to Africa’s largest proved crude-oil reserves. Futures for January delivery declined $2.15, or 2.1 percent, to $98.34 a barrel at 10:35 a.m. in New York today.
Oil is Iran’s biggest export, earning the country $73 billion in 2010 and accounting for half of government revenue, according to the Energy Department in Washington. The nation produced about 3.56 million barrels a day in November, according to data compiled by Bloomberg News. That’s more than the 3.12 million barrels a day of spare capacity available at the Organization of Petroleum Exporting Countries.
The U.S. and Europe are targeting Iran’s oil industry in an effort to deprive President Mahmoud Ahmadinejad’s government of cash to sustain its nuclear program. The International Atomic Energy Agency said Nov. 8 that Iran continued working on nuclear weapons at least until last year, including efforts to shrink a Pakistani warhead design to fit atop its ballistic missiles.
“There’s a lot going on that has justifiably amped up the security premium,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said in a telephone interview on Dec. 5. “That’s why you see the interest in the $150 strikes on these call options.”
Demand for June $160 call options jumped after protesters attacked the British embassy in Tehran on Nov. 29. Open interest increased more than fourfold to 11,833, equivalent to more than 11.8 million barrels of crude, from 2,780 options the day before.
The U.K. ordered Iran to close its London embassy and withdraw its diplomats in response to the attack. Two days later, the European Union expanded sanctions against Iran and began considering a ban on imports of the country’s crude.
“The odds that something goes terribly wrong are increasing,” Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $1.3 billion, said in a telephone interview last week. “When you have that, you get someone taking a flyer on $160 oil.”
The EU imported 450,000 barrels a day of Iranian oil from January to June, which is about 3 percent of the region’s needs, according to the Energy Department.
Iran supplied half of Turkey’s imports, 11 percent of China’s, 11 percent of India’s and 10 percent of Japan’s, the Energy Department said.