Supply and demand fundamentals drive oil prices. Things like OPEC+ production plans and U.S. driving patterns matter the most — until they don’t. That’s when the wizardry of Wall Street takes over, giving prices a push up or down beyond what the physical fundamentals warrant.
The oil market is on the cusp of one of those moments.
For the last 18 months or so, bullish oil traders had been accumulating huge numbers of contracts that give them the right to buy crude at a particular price and time — call options, in the industry’s jargon. They’ve bought thousands of those contracts pegged to $100, $105, $110, $125 and even $150 a barrel. For many, they were akin to lottery tickets: a cheap way to bet on surging prices in the future.
At the height of the Covid pandemic, the contracts sold for almost nothing. With lockdowns in place and energy demand weak, the likelihood of oil prices surging to triple-digit levels looked freakish. A year ago, one could buy a $100-a-barrel call option for December 2022 for just 24 cents a barrel. Fast forward to today: That lottery ticket is worth $4.2 per barrel. There were even cheaper tickets: The December 2022 call option for $125 a barrel sold for as little a 9 cents a year ago. Today, it’s worth nearly 15 times more: $1.35 a barrel.
Despite the price surge, few are selling their call options just yet. Instead, many hedge funds and other large investors are patiently awaiting a much bigger prize: for oil prices to rise further so they can exercise their call options in full and enjoy the right to buy crude below its market price.
No comments:
Post a Comment