Brent Oil Options Priciest in 3 Years Before OPEC Meeting

Investors are paying the most in more than three years to insure against price moves in Brent crude futures in the run-up to tomorrow’s OPEC meeting.

Implied volatility for at-the-money options in the front-month Brent contract, a measure of expected futures movements and a key gauge of options value, rose to 38.9 percent today, the highest level since October 2011, according to data compiled by Bloomberg. Analysts surveyed by Bloomberg were split evenly over whether OPEC will cut production as oil plunged into a bear market.

“People are putting more premium in there because they are anticipating a very big move in prices after the OPEC meeting,” said Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors. “Nobody really knows what OPEC is going to do. Volatility comes from the uncertainty.”

Brent for January settlement dropped 6 cents to $78.27 on the London-based ICE Futures Europe exchange. Front-month futures prices have decreased 32 percent from this year’s high in June.

Volatility stayed below 20 percent this year through September and was as low as 12.4 percent in June. Among Brent options, January $80 and $85 calls were the most actively traded yesterday. Both had volume above 7,000 contracts. January $75 puts were the third-most traded. Call options give investors the right to buy oil at a designated price and puts the right to sell.

West Texas Intermediate, the U.S. benchmark, dropped 11 cents to $73.98 a barrel on the New York Mercantile Exchange. WTI implied volatility was 36 percent today after reaching 36.8 percent yesterday, the highest since June 2012.

ETF Volatility

The CBOE Crude Oil Volatility Index, which measures oil price fluctuations using options of the United States Oil Fund, the largest ETF tracking U.S. oil futures, was 37.1 today, after reaching 37.5 yesterday, the highest since July 2012.

Oil prices have slumped as production in the U.S. and abroad has surged, outpacing global demand growth. The 12-member Organization of Petroleum Exporting Countries, which pumps about 40 percent of the world’s oil, will discuss its production level at the meeting in Vienna tomorrow.

OPEC pumped 30.97 million barrels a day in October, exceeding its 30 million-barrel target for a fifth straight month, data compiled by Bloomberg show. The “market will stabilize itself,” Saudi Arabia’s oil minister, told reporters in Vienna today. The world’s largest oil exporter yesterday failed to agree on a plan with Russia, Venezuela and Mexico to curb output.

The outcome of tomorrow’s meeting “will inevitably lead to a sharp move in prices in one direction or the other,” said Harry Tchilinguirian, BNP Paribas SA’s London-based head of commodity markets strategy, in a report yesterday. “Implied volatility is now looking expensive in the absence of a clear view on price direction.”

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