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Page added on December 25, 2016

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Oil Price Roulette: Investors Bet On $100 Oil


Oil prices are rising and speculators are already staking out bullish positions on futures for the next few months, but some traders are rolling the dice on a much bigger price spike in the next two years.

Some contracts that pay off big time if oil prices hit $100 per barrel by December 2018 just saw a spike in interest, according to Bloomberg. The $100 December 2018 call option, Bloomberg says, “was the most traded contract on Tuesday across the whole ICE Brent market.” That contract gives the owner the right to buy Dec. 2018 futures at $100 per barrel.

Few oil analysts expect oil prices to rise that high within the next two years. The oil market is still oversupplied, and even with the OPEC deal – which will take 1.8 million barrels per day off the market if fully fulfilled – the world is still flush with oil sitting in storage. It will take time to work through those inventories, providing a cushion to a tightening market. However, the sudden interest in such a remote possibility of a large price spike suggests that investors are growing more confident that the market is on the upswing.

“That’s a relatively cheap lottery ticket,” Ole Hansen, head of commodity strategy at Saxo Bank A/S, said in an interview with Bloomberg. “It’s clearly not the consensus in the market that we’re going to see a return to those prices any time soon, so it’s more likely a hedge against unforeseen geopolitical events during that time.”

Purchasing these options may not be such a huge risk – Bloomberg says they could cost a bit more than $1 million while the payoff would be multiples of that if prices happened to go that high. It is similar to going to Vegas and playing roulette, putting some money on a single number or a few numbers, which have long odds but huge payouts. On the other hand, the spike in interest in the $100 options could also just be a small part of a broader hedging program from some companies, cropping up now since the contracts are two years out.

With oil back above $50 per barrel, money managers have become much more bullish on crude. In fact, collectively, hedge funds and other investors have sold off short bets and purchased long positions, building up the most bullish net-long position in more than two years. OPEC has not yet cut back by a single barrel, but its Nov. 30 deal in Vienna has succeeded in sparking a bull run for oil.

3 Comments on "Oil Price Roulette: Investors Bet On $100 Oil"

  1. rockman on Sun, 25th Dec 2016 8:54 am 

    Besides those just “rolling the dice” on a bet of oil prices down the road there are additional players: oil producers and refiners. And their primary goal isn’t making a profit but not losing more money then they might other wise. IOW it’s a method of minimizing the effects of the volatility of oil prices. A refiner makes a bet they “win” whether prices are high or low: if high the monies they make from their future contracts offsets what they have to pay for more expensive oil they buy to crack. And if low the monies they loose on the futures contracts they make up by buying less expensive oil to buy. It would be interesting to see the breakdown between real oil buyers/sellers and pure speculators. Though I’ve never seen those numbers I suspect the vast majority are speculators give the volume of those contracts greatly exceed actual global production…often over 1 BILLION BBLS.

    And if contract price is exactly what the price of oil is at expiration then they break even. Well, almost: they pay a small commission when they buy the contracts.

  2. Sissyfuss on Sun, 25th Dec 2016 9:12 am 

    The present day machinations of commerce reflect more so the workings of a Trump casino than anything Adam Smith conjured up. How the money changers have kept this beast breathing is as mysterious as modern day politics. These are truly interesting times.

  3. Mark Ziegler on Tue, 27th Dec 2016 7:01 pm 

    $100.oo option is what drives a recession.
    Just another sign of greed of a few people.

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