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Call options bet on oil hitting $200

Financial Times: Call options bet on oil hitting $200

By Javier Blas and Chris Flood in London
Published: May 9 2008 03:00 | Last updated: May 9 2008 03:00

The number of financial bets on crude oil prices hitting $200 before the end of this year have spiked almost 40 per cent since the start of May, a further sign of growing concern that oil prices will continue to rise sharply in the near term.

The strong buying of these call options – contracts that give holders the right to buy crude oil at a predetermined price and date – comes as spot oil prices in New York yesterday hit a fresh record high of almost $124 a barrel.

There were 21,002 outstanding contracts for Nymex December 2008 call options at $200 a barrel yesterday, up 38 per cent since the end of April.

Holders of the options would make a profit if the oil price exceeds that level by the end of the year.

Since the beginning of the year, the so-called “open interest” in these contracts has jumped fourfold. The number of outstanding contracts at $150 a barrel is also rising sharply.

Traders said the rise in call options buying reflected the fact that energy consumers, such as airlines or utilities, were hedging their exposure to rising oil prices, and financial investors were also trying to profit from a potential spike.

In the spot market, Nymex June West Texas Intermediate surged to $123.9 a barrel yesterday, before slipping back 95 cents to $122.60 a barrel on profit taking. Crude oil prices are 99 per cent higher than they were 12 months ago and have contributed to inflationary concerns.

Goldman Sachs and Barclays Capital have both warned this week about even higher oil prices.

Paul Hornsell, of Barclays Capital, raised his price forecast for the second half of the year to an average of $126 a barrel.

KBC Market Services, the oil advisory firm, said yesterday that just as oil broke through the $85 and $100 a barrel levels last October and in February, finding significant resistance at first which turned into support, crude prices were now likely to find support at $120 a barrel.

Opec, the oil countries’ cartel, yesterday blamed the price surge on the dollar weakness rather than a lack of production.

“There is clearly no shortage of oil in the market,” said Abdalla El-Badri, Opec’s secretary general.

Nauman Barakat, of Macquarie in New York, compared the $200 a barrel call options to lottery tickets.

“If all the bullish factors in the market stay intact and oil moves towards $200, the call options will look like a great play,” he said, noting that it only cost investors 70 cents to buy the December option.

Traders said that for some investors, it made sense to buy the $200 call option as the potential loss – the 70 cents they pay for the contract – is small enough compared with the potential reward.

But the low price of the options also indicates that the market sees a low chance of prices spiking to $200 a barrel, the traders said.

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