According to FactSet data, with oil prices soaring by about 9% last week, traders in the oil options market are showing unprecedented interest in betting on call options for oil prices to rise to $100 per barrel.

According to FactSet data, with oil prices soaring by about 9% last week, traders in the oil options market are showing record interest in betting on call options for oil prices to rise to $100 per barrel next month.

Last Thursday, the number of open contracts for $100 call options expiring in November at the Cboe Global Markets hit a historic high, reaching 18,628 contracts. The number of open contracts for $100 call options expiring in December also reached 41,424 contracts, breaking the highest level since September 20.

These call options give traders the right to buy oil futures contracts at that price, although they are not obligated to buy the contracts.

Previously, Iran launched a large-scale missile attack on Israel last week, with the Israeli government vowing revenge. Meanwhile, on the first anniversary of the new round of Israeli-Palestinian conflict, Hamas, Houthi armed forces in Yemen, and armed factions of Hezbollah in Lebanon all launched rocket and missile attacks on Israel on Monday. Israel continued its offensive towards the northern borders of Gaza and Lebanon.

Phil Flynn, Senior Client Manager and Market Analyst at Price Futures Group, stated, "We witnessed the largest jump in oil price volatility in over two years last week. Previously, the crude oil market seemed to be 'immune' to geopolitical risk factors - people ignored these geopolitical factors, and hedge funds pushed oil prices lower time and again. But now, this is a wake-up call as geopolitical risks are becoming a reality."

Many traders are currently concerned that the energy infrastructure in the Middle East, especially in Iran, may be attacked, potentially disrupting oil supply or causing a blockade in the Strait of Hormuz. US President Biden mentioned on Thursday that Israel had considered attacking Iranian oil facilities to retaliate for Iran's missile launch against Israel last week. He later suggested Israel should consider other options.

Iran currently exports about 1.7 million barrels of crude oil per day, mainly from a terminal on Kharg Island located approximately 25 kilometers off the southern coast of the country.

Flynn pointed out that this could potentially disrupt the supply of a major oil-producing country, which would be difficult to replace. He explained, 'If we do indeed see a significant cut in Iran's oil exports for some reason, the global economy may face one of the most tense supply-demand situations in decades.'

He added, 'This could lead to a sharp rise in oil prices, not only causing problems for the global economy, but also for the Federal Reserve, as they need to balance the impact of rising oil prices on the economy (between economic slowdown and potential new inflationary pressures caused by surging oil prices).'

Traders are quickly adjusting their positions.

Signs indicate that many hedge funds had previously bet on the continued decline in oil prices this year, but now they have started to adjust their positions. According to Intercontinental Exchange (ICE) data, as of the week ending October 1 (in the early stages of last week's oil price rise), fund managers reduced significant short positions in Brent crude and increased long positions.

Flynn stated that the escalating geopolitical tensions are leading more and more energy market traders to hedge against the prospect of oil prices soaring to $100 per barrel.

"I believe $100 per barrel in the short term is the worst-case scenario. But that doesn't mean there isn't a lot of trading capital to hedge against this worst-case scenario in these options," he pointed out. In fact, if you look at the number of options priced above $100 per barrel, for various reasons, the quantity is three times more than usual. Flynn explained, 'Many who were bearish on this market are now caught, paying hedging costs for the worst-case scenario.'

Regarding these $100 call options, Flynn said, 'Although these options may not seem profitable at the moment, in the event of a significant surge in oil prices, your investment can double or even triple. If this situation does not occur, then your risk is basically limited to the cost you paid for the option.'

Goldman Sachs recently stated in a report that if Brent crude oil and West Texas Intermediate crude oil prices rise significantly, algorithm-driven traders known as Commodity Trading Advisors (CTAs) may unleash up to $40 billion in bid.

Goldman Sachs analysts point out that if Iranian oil supply is affected, Brent crude oil prices could reach $90 per barrel or higher, with the specific price impact depending on whether other OPEC member countries increase production to compensate. If Iran's supply decreases by 1 million barrels of oil per day (e.g. due to increased enforcement of sanctions), with OPEC taking action to fill the supply gap, Brent crude oil prices could rise to around $85, and without action, Brent crude oil prices could peak at around $95.

On Monday, Brent crude oil futures prices rose by 3.7% to $80.93 per barrel, while U.S. WTI crude oil futures prices rose by 3.7% to $77.14 per barrel. Last week, both benchmark crude oils rose by 9.1%.

In a report, David Oxley, Chief Climate and Commodity Economist at Kayrros Macro, also stated that the risk of supply disruptions increased after Iran launched a missile attack on Israel last week.

He pointed out, "The greatest risk is a tit-for-tat escalation, ultimately leading to a disruption in shipping in the Strait of Hormuz. Risk premiums will dominate in the short term; depending on developments, oil prices could imagine climbing another $20 per barrel."

Editor/ping