What Options Traders Tell Us about a Hundred-Dollar-Oil

As materials and Metals’ post-Covid recoveries are featured by an uneven pace, oil prices seem to post a strong momentum. With U.S. WTI futures having plunged below zero in April 2020 almost knocking out the largest oil ETF, The United States Oil Fund (USO), the main question is not the direction of the oil prices trend, of course, but impending volatility. The latter depends on a number of factors. U.S. and global benchmark crude prices scored their highest levels since October 2018 and May 2019, respectively.

The American Petroleum Institute recently showed a draw of 2.11 million barrels of oil for the week ended June 4. However, gasoline inventories reportedly showed a build of 2.41 million barrels and Cushing inventories declined by just 420K barrels.

Judging by the OPEC data, there will be a stable deficit on the world oil market in the next three quarters. On average, about 3,1 m/bd. So, there is certain reason why, according to WSJ report, oil traders are heavily long on call options tied to Brent and WTI crude oil prices betting it will reach $100/bbl by the end of next year, a milestone not seen since 2014. So far, oil surged more than 40% year-to-date.

According to WSJ, speculators are betting on higher volatility “more than they are actually expecting higher oil prices”, which, again, sounds fair. Therefore, these call options may represent in large parts compositions of certain options strategies. No wonder, assuming the algorithmic trading nature of that activity, many trading robots detected spikes in underlying implied volatility which, in turn, drove the corresponding trading activities.

A hundred-dollar-oil by yearend or not, but this unusual unity must be viewed as an explicitly positive sign for the underlying asset by itself. Speaking purely technically, oil will hit a strong resistance above $80/bbl for Brent and above $73/bbl for WTI. Moving higher will require paying attention to all classic fundamentals including supply-demand equations, as well as predicting OPEC’s own scenario. That is something that is very unlikely to be hailed by the very mentioned oil options traders, however, one thing is apparent – there is still sizable room to grow.