Oil investors are buying contracts that will only pay out if crude rises well above $100 a barrel over the next four years, a clear sign some believe today’s bust is sowing the seeds of the next boom.
The options deals, which brokers said bear the hallmarks of trades made by hedge funds, appear to be based on the belief that current low prices will generate a supply crunch as oil companies cut billions of dollars in spending on developing fields, Bloomberg reported.
The International Energy Agency forecasts that non-OPEC supply will suffer its biggest decline in more than two decades this year.
“The market faces a supply crunch in the next 24 months,” said Francisco Blanch, head of commodities research at Bank of America Merrill Lynch in New York. “Some hedge funds are betting that oil prices will need to rise sharply to bring demand down again, that’s why they are buying deep out-of-the-money call options.”
Over the last month, investors have bought call options—giving the right to buy at a predetermined price and time—for late 2018, 2019 and 2020 at strike prices of $80, $100 and $110 a barrel, according to data from the New York Mercantile Exchange and the US Depository Trust & Clearing Corp.
Even before the most recent flurry, some investors had already built super-bullish positions. The largest number of outstanding contracts—or open interest—across both bullish and bearish options contracts for December 2018 is for calls at $125 a barrel. For December 2020, it’s for $150 calls.
Earlier this month, one investor bought more than 4 million barrels worth of call options at $110 and $80 a barrel for 2019 and 2020 in several transactions.
Funds making the trades are not necessarily expecting prices to jump as high as $100 to $150 a barrel, as the value of their call options will increase even if prices rise far less. These kind of options speculators are buying are often seen as lottery tickets because they offer an outside chance of very large returns.
