Earlier this month, one investor bought more than 4 million barrels worth of call options at $110 and $80 a barrel for 2019 and 2020 in several transactions. In addition, another 800,000 barrels worth of $60 a barrel call also changed hands. The deals are public because of new regulations introduced in the U.S. by the Dodd-Frank Act. The disclosures don’t reveal the final buyer.
Funds making the trades aren’t necessarily expecting prices to jump as high as $100 to $150 a barrel, as the value of their call options will increase even if prices rise far less. These kind of options speculators are buying are often seen as lottery tickets because of they offer an outside chance of very large returns.
The options deals suggest sentiment is starting to shift from worry about oversupply to concern about shortages as demand begins to outstrip production -- the traditional boom and bust commodities cycle.
"Large spending cuts on the back of low oil prices will lead to the demand and supply gap widening from 2018 onwards, if not earlier," Abhishek Deshpande, oil analyst at Natixis SA in London, said. "This is likely to push oil prices up as early as 2017," he added.
There are also reasons to be skeptical that this year’s rally from less than $30 in January to more than $50 today will be sustained. Production outages in Canada and elsewhere will probably prove temporary, U.S. shale producers may bring fields back on line as prices rise and global stockpiles remain well above historical averages.
Last year, some investors took the opposite bet, buying large amounts of bearish put options that would only pay if prices plunged below $30 a barrel. When West Texas Intermediate oil briefly fell in February to a 12-year low of $26.05 a barrel, the value of those options surged and speculators cashed in.