A bullish trade in bullish crude oil options says the 2021 energy rally is far from over.
Traders once again are betting that the benchmark oil price will soar above $100 a barrel in December from a recent $82, as early as December. U.S. crude, known as West Texas Intermediate or WTI, is up 10% this month and 70 percent this year, but it hasn't hit $100 since the oil crash of 2014.
The movements across the Atlantic are even more aggressive. Some traders bet that Brent crude, the global benchmark, will hit a record high of $200 a barrel by December 2022, according to data from data provider QuikStrike. Options give investors the right to buy or sell at a specified price by a given date. Traders usually make binary options to make directional bets or hedge their portfolios.
The bullish trading amounts to a gamble that supply chain disruptions and regional shortages will keep pushing energy markets higher despite a slowing global economic expansion and concerns that higher oil and natural-gas prices will crimp consumer spending. The wagers also show that investors drawn by the potentially quick upfront investments and small payouts of options trades are piling into energy markets echoing trades in the stock market this year.
I haven t seen such crazy strikes as this in a long time, says Mark Benigno, co-director of Energy Trading for StoneX Group Inc. referring to the price in the underlying asset at which the options become exercisable. The momentum and trend is higher. Wall Street is watching whether the energy price surge will disrupt third-quarter corporate earnings. Delta Air Lines Inc. warned investors on Wednesday that it expects higher fuel prices to undercut profit in the fourth quarter. In coming days, earnings from airlines including United Airlines Holdings Inc. and American Airlines Group Inc. will shed more light on the issue.
The supply squeeze has already had profound effects. Most recently, U.S. crude reached its highest level in almost seven years. All year, natural gas prices have doubled and are trading above $5 to million heat bills in British markets. Some warn of a prolonged bout of inflation, others warn that high energy prices will hit consumers who are already expecting to pay more for heat this winter.
Wall Street is watching whether the energy price surge will impact third-quarter corporate earnings. Delta Air Lines Inc. warned investors on Wednesday that it expects higher fuel prices to undercut profit in the fourth quarter. In coming days, earnings from airlines including United Airlines Holdings Inc. and American Airlines Group Inc. will shed more light on the issue.
The supply squeeze already had profound effects. The U.S. crude industry hit its highest level in almost seven years recently. Natural gas prices have more than doubled this year and trade above $51 million of British thermal units. Some warn a prolonged bout of inflation, others say that high energy prices will hit consumers who are already expecting to pay more for heat this winter.
Call options tied to WTI jumping to $95 or $180 a barrel have also been popular during the past week, show QuikStrike data.
Mr. Benigno said that speculative traders have made aggressive, bullish bets on oil over the past year in the short term. As commodity rally accelerated, many of them appeared to close out their existing options positions and pegged their bets to even higher prices in a wager that oil would keep soaring.
At the same time, the volume of bullish activity could make for large, single-day pullbacks on oil markets if economic data or other information comes to light that conflicts with the economic narrative.
Analysts told JPMorgan Chase Co. this month that they expect Brent crude oil to hit $84 by the end of the year, reaching $81.53 a barrel. Bullish sentiment and positioning have driven prices up alongside the prospect of a colder winter. Oil fundamentals could ultimately disappoint the hype, they wrote in a note on Oct. 1. We also think downside risks are under-hyped.