Oil Speculators’ Growing Belief in OPEC Deal Shows Up in Options

  • Options to buy Brent most favored vs sell options since March
  • Oil traders bought record number of bullish WTI options

Oil Glut Here to Stay Despite OPEC: Bob Iaccino

Speculators are starting to believe the Organization of Petroleum Exporting Countries can reach a deal to cut output next week, sending prices and trading volumes of bullish options surging.

The so-called put-call skew -- a measure of the difference in demand for options used to protect against price drops compared those that insure the buyer against increases -- closed on Monday with its highest bullish reading for Brent crude since March. The shift came days after oil investors traded a record number of bullish options contracts for benchmark U.S. crude.

"A few market participants are starting to position for a possible OPEC production cut," Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd. in London, said in a note to clients.

OPEC is in a final week of talks to try to overcome differences about how to share output cuts and implement the supply deal first outlined in late September. At discussions in Vienna this week -- ahead of a ministerial meeting on Nov. 30. -- OPEC delegates painted a positive picture and said an agreement was imminent. Brent crude has gained more than 10 percent since the start of last week.

Ahead of the OPEC meeting, "re-positioning is under way", said Tamas Varga, an analyst at London-based broker PVM Oil Associates Ltd.

In a sign of how oil speculators are starting to price a potential OPEC deal, the skew for Brent front-month call options -- which give the holder the right to buy crude in the future at a set price -- closed at 1.1 on Monday, the highest reading since late March. The skew favored put options -- which give the right to sell at an agreed level -- for most of the year, showing that traders had been paying more to protect against potential price drops than increases.

Bullish Shift

On Monday, seven of the 10 most-active Brent options were calls. The most actively traded contract on Monday, the $50 call, has risen in value from 23c on Friday to 90c Tuesday.

"Brent and WTI option skews have continued to shift to be more bullish," Adam Longson, oil analyst at Morgan Stanley in New York, said in a note.

The skew in the market for West Texas Intermediate, the U.S. benchmark, is tilted toward puts, but investors are still buying call options with gusto. The total volume of WTI calls rose to a record of 303 million barrels last Tuesday, according CME Group Inc. data compiled by Bloomberg. That far exceeded a prior record of 221 million barrels, set five and a half years ago. Traders bought 57 million barrels more call options than put options on Monday, CME Group data show.

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