Bets double on oil hitting $200

The number of financial market bets on crude oil prices hitting $200 a barrel before the end of this year has almost doubled in the past month, 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 London yesterday hit a record high around the $146 a barrel level.

In London, Brent oil hit an intraday record of $146.69 a barrel, up 55 per cent since January. In New York, West Texas Intermediate hit a high of $145.85.

Gazprom, the Russian energy giant, reiterated yesterday that oil prices could surge to $250, although most industry executives have dismissed the forecast.

Investors are also piling into call options at levels between $150 and $175 and a minority are buying so-called “lottery tickets” – call options at $300 a barrel.

Nauman Barakat of Macquarie in New York said that investors were again buying call options at $300. “I assume on the presumption that some sort of a confrontation will take place [in] Iran,” he said. “But even without this premise I remain a bull and I think we will take $150 out sooner rather than later,” he added.

Some traders are dismissive about the significance of highly priced call options, but others noted that options that a year ago were also considered “lottery tickets” are now below today’s oil price.

There were 29,775 outstanding contracts for Nymex December 2008 call options at $200 a barrel yesterday, up 87.5 per cent since June. Since the beginning of the year, the so-called “open interest” in these contracts has jumped 600 per cent.

At the same time, oil companies are buying put options – contracts that give holders the right to sell crude oil at a predetermined price and date – to lock in record oil prices. Traders said there has been strong interest in put options for delivery later this year and through the next two years at levels around $110-$120 a barrel.

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

Commodity bankers said some consumers have come to the conclusion that record oil prices are here to stay.