Trading in relatively cheap option contracts that would profit from crude soaring to as much as $110 a barrel has taken off in the past two weeks. In total, the equivalent of more than 45 million barrels of $90, $100 and $110 calls, have traded in the last 9 sessions, Bloomberg reported.
Those trades come against the backdrop of disruptions to supply in major oil producing nations. US sanctions have forced output in both Iran and Venezuela sharply lower, while America has also dispatched an aircraft carrier to the Middle East in a warning to its Persian Gulf nemesis. With turmoil in other OPEC nations, some are looking at political risks as a source of potential value, Financial Tribune reported.
“Geopolitical risk offers good risk-reward to hedge or trade right now,” said Thibaut Remoundos, founder of Commodities Trading Corp. in London, which advises on hedging strategies. “High conviction views on anything else are difficult in this market at the moment.”
The oil market has been here before. In September, a flurry of $100 calls traded as top executives talked up the potential for prices to soar as US sanctions on Iran were set to take effect.
With crude subsequently slumping as President Trump wrong-footed the market by granting sanctions waivers to key Iranian customers, and prices tumbling more than 40%, such trades then disappeared.
It is not just the intensifying tensions between the US and Iran that have revived the trade. There is also civil unrest in Algeria, and a spiraling conflict in Libya, neighboring North African members of OPEC.