December 12, 2011 6:25 pm
Fat-tail fears catch oil traders between $50 and $150 bets
Investors and traders are buying large numbers of oil contracts that would profit from a price super-spike – and a collapse.
In a rare and deep split of views, investors and traders are pricing in unusually large “fat tail” risks – low-probability events that have an outsize impact on prices – for next year that could boost oil prices to $150 a barrel or push them to $50 a barrel.
“We face a bifurcated market: a crisis in the Middle East could send prices through the roof; the eurozone debt problems could trigger a collapse,” Seth Kleinman, head of energy strategy at Citigroup, said echoing a widely held view in the market.
The fear of abnormally large “fat tail” risks has driven investors to buy insurance through options – contracts that give holders the right to buy or sell crude oil at a predetermined price and date.
“Everyone I speak to on crude oil, if they have a directional bet they do it through out-of-the-money options,” said Fabio Cortes, a commodities fund-of-funds manager at Oakley Capital. “It’s like a lottery ticket.”
The big upside and downside price risks for 2012 will be a key consideration at the meeting of the Opec oil cartel on Wednesday in Vienna, when ministers from the oil cartel decide their supply strategy for the next quarter.
Ali Naimi, Saudi oil minister and de facto leader of the group, said on Monday on its arrival to the Austrian capital that he was “happy” with current output levels, adding that he saw oil demand growth coming “all over” the world.
Brent oil, the global benchmark, traded on Monday at $108 a barrel.
Although investors are taking out insurance for both bullish and bearish “fat tail” risks, the recent buying has concentrated on upside factors emanating from any EU embargo on Iran, according to the number of outstanding options contracts on the New York Mercantile Exchange, a proxy for the size of the overall market.
The number of financial market bets on oil prices hitting $130-$155 a barrel by the end of next year has risen more than 25 per cent over the last six months to 93,500 contracts, a sign of growing concern about upside price risks. The buying of these call options – contracts that give holders the right to buy – jumped last month after the EU started to debate an oil embargo on Iran.
But at the same time, investors have been loading up the opposite financial bet: put options, or contracts that give holders the right to sell. According to Nymex data, the open interest for put options at the $45-$60 a barrel price level for next December has increased more than 33 per cent over the last six months to just above 60,000 contracts. Investors bought an unusually large amount of put options in September, when the eurozone crisis worsened.
Additional reporting by Jack Farchy in London and Sylvia Pfeifer in Vienna
Copyright The Financial Times Limited 2011
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