Oil Drops as Iraq Violence Seen Sparing Crude Supplies

Options traders are over-estimating the chances of violence in Iraq disrupting immediate crude supplies from the country, according to BNP Paribas SA and Barclays Plc.

Call options to protect against oil-price gains next month exceed the cost of put contracts to hedge declines by 3 percentage points, according to exchange data compiled by Bloomberg. The premium, known as a call skew, is the highest since August. BNP Paribas is advising investors to bet it won’t last and Barclays also anticipates a narrowing, without recommending the same trade.

While fighters from the Islamic State in Iraq and the Levant this month took Mosul, the nation’s second-largest city, and attacked Iraq’s biggest oil refinery, they’ve yet to hinder crude output. Oil Minister Abdul Kareem al-Luaibi said in an interview yesterday that exports will surge next month because the fighting hasn’t curbed production. The Organization of Petroleum Exporting Countries said the day before that it will cover any shortages should Iraq’s supply be disrupted.

“The bottom line so far is we do not have a supply disruption,” Harry Tchilinguirian, BNP Paribas’s head of commodity markets strategy in London, said by phone today. The bank recommends selling September Brent call options and buying puts.

Brent futures rose to a nine-month high last week, ending the contract’s least-volatile period ever, as ISIL’s fighters swept across the country’s northwest, supported by local Sunni militia. The fighting hasn’t spread to the Shiite-dominated south, which the U.S. Energy Information Administration estimates is home to more than three-quarters of Iraq’s crude output.

Options Delta

Call options for August Brent with a 25-delta have an implied volatility of 17.6 percent today, compared with 14.6 percent for corresponding put options, exchange data compiled by Bloomberg show. An oil option with a delta of 25 will move by approximately 25 cents for each movement of $1 in the related crude future.

The call-skew hasn’t been so pronounced since oil prices soared last August amid speculation the U.S. would take military action against Syria, potentially igniting a wider regional conflict. The North Sea grade traded near $114 a barrel in London today.

Risky Bet

Uncertainty in Iraq makes betting against the call skew risky, Ole Hansen, the head of commodity strategy at Saxo Bank A/S in Copenhagen, said by e-mail on June 24.

Exxon Mobil Corp. and BP Plc began removing some employees from projects in Iraq last week while keeping output unchanged. The International Energy Agency cut its forecast for Iraq’s capacity expansion to 2019 by 470,000 barrels a day in a report on June 17. The country will boost production by a “conservative” 1.28 million barrels a day to produce 4.54 million a day by then, the IEA estimates.

“In a situation like this, I would rather be a buyer,” Hansen said. “This is not the time to hand over control to someone else considering how strong markets potentially can react in either directions.”

OPEC sees no shortage or any need to hold an emergency meeting as a result of the Iraq crisis, the group’s Secretary-General Abdalla El-Badri said on June 24.

With alternative supplies from the North Sea and West Africa available, the call-skew will probably ease unless Iraqi production is curtailed, Miswin Mahesh, an analyst at Barclays Plc in London, said by e-mail on June 24. The U.S. could also release crude from its Strategic Petroleum Reserve if supplies become constrained because of Iraq, he said today.

Iraq pumped 3.3 million barrels a day last month, data compiled by Bloomberg show, making it the largest producer after Saudi Arabia among OPEC’s 12 members.

“It’s just a fear factor,” Mahesh said by phone today. “We will see a correction if the headlines from Iraq start fading away.”

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