By Javier Blas, Commodities Correspondent
Published: November 5 2007 22:18 | Last updated: November 5 2007 23:13
Energy consumers and speculators are scrambling to take out options contracts to insure themselves against oil prices rising above $100 a barrel – a further sign of growing expectations of a spike in the crude market.
Some have even taken out contracts to protect themselves against prices rising to $250 a barrel in the next two years.
The buying frenzy has been “extraordinarily” strong in the past week as oil prices rose to a record high of $96.24 a barrel, according to traders and bankers.
“Options calls of strikes well over $100 a barrel are being bought by the thousands,” said Nauman Barakat of Macquarie Futures in New York.
The strong flows in call options – contracts that give the right to buy at a predetermined price and date – are boosting short-term oil prices as the banks that sell them have to hedge some of their positions by buying crude oil in the spot market.
There has already been a sharp increase in the number of outstanding options contracts, or “open interest”, at the New York Mercantile Exchange. This represents only a fraction of the overall market, which is concentrated on over-the-counter deals.
The open interest in Nymex December 2010 call options at $100 a barrel rose on Monday to 24,903 contracts, double the level of the start of the year. The open interest at $120, $160 and even $250 a barrel is also rising although from a significantly lower level. The open interest in $100 a barrel call options for December 2008 has doubled since the start of the year.
Banks hedging the call options they have sold or are selling has been a factor pushing prices towards $100 a barrel, according to traders. But fundamentals have also played a role.
The open interest at the December 2007 call option at $100 a barrel is unusually high at 48,032 contracts. As banks cover their positions, that could push the spot price towards $100 a barrel.
“High open interest for December 2007 calls at $100 speaks plenty of the ingrained nature of the target in market psychology,” said Harry Tchilinguirian, at BNP Paribas in London.
But traders said the market was vulnerable to a correction once the options contracts for December expired next Tuesday.
Copyright The Financial Times Limited 2007