LONDON May 11 Oil traders are snapping up
options to protect against another steep price drop in case OPEC
and its partners fail to deliver enough of a supply cut to
satisfy investors of their commitment to tackle a three-year-old
surplus of unused crude.
The Organization of the Petroleum Exporting Countries meets
on May 25 and will discuss extending its agreement forged with a
number of its rivals, including Russia, late last year to cut
output by 1.8 million barrels per day in the first half of 2017.
That the supply agreement will be extended is being billed
as a dead cert, not least by the de facto leader of OPEC, Saudi
Arabia, whose energy minister said the group would do "whatever
it takes" to reduce global inventories.
But the price of crude oil is lingering around $50 a
barrel, close to its lowest levels this year.
Volatility, one way of measuring the price of an option,
remains fairly muted by historical standards, but has picked up
the most for bearish sell options expiring on May 26, one day
after OPEC's meeting.
This suggests investors are willing to pay up more for
protection against a sudden, sharp drop in the price.
"Before, OPEC was given the benefit of the doubt. Now, the
market says 'show me the data'," said Ole Hansen, senior manager
at Saxo Bank, referring to figures on global inventories. "It is
a testing time, no doubt."
"There are still many (bullish players) in the market that
are potentially starting to look for a handbrake and that has
increased demand for downside protection ... the market is
uncertain about whether it will be $40 next or $55."
A put option, which gives the holder the right, but not the
obligation, to sell oil at a set "strike", or price, by a
certain date, is one way of securing that protection.
Volatility on three-week put options with strikes well below
the current price has risen to 37 percent from around 32 percent
a week ago. When OPEC announced its decision to cut supply this
year, volatility rose to nearly 70 percent on similar options.
Options on July Brent futures, which expire on the day of
the meeting itself, show most open interest is clustered in put
options at $50 a barrel, followed by call options - which give
the right to buy at an agreed price - at $52 a barrel.
Further ahead, open interest in the last week has spiked in
December $40 and $45 puts, which suggests investors believe the
underlying Brent futures could well be trading below those
levels by the end of the year.
"I'd argue you could see $8-10 off the price (in case of
disappointment)," one options trader said. "You will see more
put buying here and even with an extension, you still might see
The price of oil fell by 5 percent last week, under pressure
from investors concerned over OPEC's ability to cut supply
enough to counter rising U.S. output.
But the options market can often paint more than one
picture. While interest in bearish sell options has picked up,
traders have also snapped up cheap buy, or call, options.
With the sell-off last week, the premium of out-of-the-money
puts over that for out-of-the-money calls, or "skew", expiring
around the time of the meeting shrank to its smallest in a
month, around 110 basis points.
Back in April, the premium for options expiring on, or close
to, May 25, was closer to 400 basis points.
BNP Paribas head of commodity strategy Harry Tchilinguirian
said this development showed sentiment in the market was not
quite as "unilaterally bearish" as some might believe.
"When the price was collapsing, skew would (normally) have
been bid on the puts and it wasn’t, it went the opposite way,"
"Does that mean the market is now viewing $40 before $50?
(Reporting by Amanda Cooper; Editing by Dale Hudson)