Oil traders betting a big oil price swing to come soon

Oil traders betting a big oil price swing to come soon

Since October, the crude oil options market has appeared curiously calm. Oil prices have settled nicely between $70 and $80 per barrel and, early last week, the CBOE Crude Oil Volatility Index (the seismograph of the oil market) fell to its lowest point in more than two years. Unimpressed by the relative placidity of the New York Mercantile Exchange, many financial traders – like surfers looking for the next big wave – abandoned the energy markets in search of profit-generating volatility.

But perhaps they were too hasty. This week, analysts have registered some substantial seismic tics in the crude market, and many are now predicting a shake-up that will get prices moving. Worries that the Chinese economy is slowing and concerns over political turmoil in Washington have sent ripples through the financial world: at NYMEX, daily crude oil option trading activity jumped over 150,000 lots on Thursday and Friday, up nearly 50 percent from the 2009 daily average, according to the Wall Street Journal.

Investors seem to be preparing for a swing in oil prices, though exactly which direction they’ll go is anybody’s guess. Some analysts, anticipating another downturn in the global economy, expect oil prices to tumble. Deutsche Bank, for instance, predicts that, by the last quarter of the year, oil will average only $60 a barrel; and while prices will steadily rise after that, the bank doesn’t expect them to exceed $100 a barrel until 2015. Others say prices will soar because of stronger economic growth and fuel consumption. On Monday, Morgan Stanley predicted oil would reach $95 a barrel by year end.

“The need for hedging is completely intact,” says Philippe Laraison, global head of energy trading with Société Générale. The bank is seeing an influx of hedgers, eager to cash in on a shift in price, returning to the market. Indeed, at least several companies share Laraison’s outlook: Southwest Airlines, Newfield Exploration Co. and Chesapeake Energy Co. all recently said they have increased their hedging positions to protect against coming price swings. Last week, Jeff Grossman at BRG Brokerage in New York said his firm saw increased buying of put options—options that give an owner the right to sell at a certain price—as investors tried to protect themselves against a downward move in oil.

Many companies were hurt in 2008 by the swing in crude prices, when oil jumped to more than $147 a barrel before sinking again into the $30s. The unpredictable swings stirred political debate and consumer outrage, as many blamed financial speculators for roiling the energy markets. Whether investors will go about matters differently given another shift in the market is something else worth betting on.

News Source: Heatingoil.com

Tags:  crude, market, oil price, oil traders, options, swing, trading