LONDON: Brent crude options show the market still has to win over the die-hard sceptics, even as investors are betting more heavily than ever before that the price break above $60 a barrel might be the start of a bigger move higher.
Data from the Intercontinental Exchange shows money managers hold more bullish positions in Brent crude futures and options than ever before, equivalent to a whopping 530.2 million barrels of oil, or nearly six days of total global consumption.
Oil prices hit their highest since July 2015 on Monday as Saudi Arabia's crown prince cemented his power with an anti-corruption crackdown, while markets continued to tighten.
It is virtually a given that OPEC will agree later this month to extend its 1.8-million bpd joint supply cut into the whole of 2018.
But will that be enough to persuade the markets that global oil inventories will drain fast enough to offset an anticipated 1.5-million bpd rise in 2018 non-OPEC supply growth alone?
The options market is pointing to this optimism persisting next year, but there is a degree of caution that has not yet been dispelled. After all, the higher the price goes, the greater the chances that the signatories to the deal might relax and allow their compliance to slip.
Looking at the first three months of next year, most open interest is clustered at buy options, or calls, at $60, at a combined 41,000 lots.
The position grew by 30 percent in the three-week run-up to the break above $60 on Oct 27, but has remained static since then.
Meanwhile, the biggest individual position in the first quarter of 2018 is now in March sell options, or puts, at $45 a barrel, at just shy of 19,000 lots.
This amount has stayed almost unchanged for the last month, even while the underlying prompt Brent futures price was surging first above $50 and then $60, overtaking prices of longer-dated contracts and pushing the market structure into backwardation.
In fact, at nearly 115,000 lots, the amount of open interest in bearish puts with strikes between $40-55 in the first three months of the year is nearly triple that in bullish calls, a stark reminder to OPEC and its partners that any investors may be quick to punish slip-ups in compliance or commitment.
"OPEC and the participating non-OPEC nations have done an excellent job in the second half of this year to start the re-balancing process. However, as any elite athlete would tell you, it is much easier to get to the top than to remain there," PVM Oil Associates strategist Tamas Varga said in a note.
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