Big bets on oil prices soaring turn worthless as Iran risk fades

LONDON – Traders who piled into bullish options bets on oil prices at record pace are waking up to a harsh reality: Most of those contracts are now worthless.

Israel refrained from striking Iran’s energy infrastructure in its long-awaited bombardment of the Opec nation over the weekend, sending crude prices crashing on Oct 28.

West Texas Intermediate plummeted 6.1 per cent to settle near US$67 a barrel, the biggest one-day drop for the US benchmark in more than two years. Brent slid 6.1 per cent to settle below US$72 a barrel.

The plunge in oil prices has helped contribute to a chunk of about 800,000 Brent December call options expiring without a profit on Oct 28 as traders’ urge to protect against a price spike evaporates.

Much of the trading around the risks from the Middle East conflict this month has happened in options markets, outpacing action in futures prices. Speculation that the attacks could disrupt oil flows in a region that produces about a third of the world’s crude drove the total number of Brent options held by investors to a record high.

Of the contracts expiring on Oct 28, fewer than 10 per cent had any value. That means that roughly 32 million barrels of US$90 and US$100 call options that were purchased since Iran attacked Israel earlier this month – triggering Israel’s vow for retaliation – were effectively wasted.

Almost 22 million barrels of US$75 calls were worth about US$35 million on Oct 25, while nearly 53 million barrels worth of US$80 calls were worth about US$22 million at that time. Both expired worthless on Oct 28.

Some traders use options as a way to hedge their exposure to their physical operations such as producing or consuming oil, while others use them as a relatively cheap way to bet on the direction or volatility in prices.

“The real fear of oil being taken off the world market has been nearly eliminated,” said Dennis Kissler, senior vice president for trading at BOK Financial Securities. Traders are re-focusing on weak demand, with near-term oil prices taking the path of least resistance lower, he added. 

Oil’s slump on Oct 28 comes ahead of a crucial few weeks for prices, with a host of influential events looming, including the US election. Opec+ plans to start gradually reviving oil production in December, and the market is watching for any change to that timeline. 

Though the planned output increase in the near-term is small, it will add supplies to a market that the International Energy Agency forecasts won’t need them. Last week, hedge funds slashed their long-only positions in WTI to the lowest in 14 years. BLOOMBERG