Options Traders Most Bearish on Oil in 8 Months as Brent SlumpsMoming Zhou
Option traders are the most bearish on crude oil in eight months after Brent slumped to a two-year low amid rising global supply.
Put options on front-month Brent futures to protect against price declines are trading at the biggest premium since February over call options to hedge price gains, according to exchange data compiled by Bloomberg. Brent, the benchmark for half of world’s oil trade, has slumped about 20 percent from the June peak, a common definition of a bear market.
“The options market certainly is signaling further downside,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy.
Implied volatility of Brent put options with 25 delta are 2.26 percentage points higher than call options, according to Bloomberg data. The premium, known as a put skew, was the biggest since Feb. 4. Implied volatility is a measure of expected futures movement and a gauge of options value. Options with 25 delta move about 25 cents when the underlying futures move $1.
The five most-traded Brent options were all puts yesterday. December $85 puts jumped 11 cents, or 44 percent, to 36 cents a barrel on volume of 5,455 lots. December $90 puts, the second-most active, gained 26 cents, or 31 percent, to $1.09 with volume of 4,880.
Brent for November settlement slipped $1.39, or 1.5 percent, to $92.03 a barrel at 12:39 p.m. on the London-based ICE Futures Europe exchange after settling at $93.42 yesterday, the lowest since June 2012.
The put skew hasn’t been so pronounced since a three-day decline sent Brent to a three-month low on Feb. 4 amid concern that slowing emerging market growth would sap global demand.
Brent dropped in four of the five days this week amid signs of rising global supplies. Output from the 12-member Organization of Petroleum Exporting Countries increased by 413,000 barrels a day to 30.935 million in September, a Bloomberg survey of oil companies, producers and analysts showed. That’s the highest level since August 2013.
U.S. domestic crude production rose to 8.87 million barrels a day in the week ended Sept. 19, the most since March 1986, according EIA estimates.
Saudi Arabia reduced the price for Arab Light to Asia by $1 a barrel to a discount of $1.05 to the average of Oman and Dubai crude, the lowest since December 2008. Official selling prices, or OSPs, are regional adjustments Aramco makes to price formulas to compete against oil from other countries.
“Demand is not keeping up with supply,” said Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors. “Fundamentally the market is very weak.”