Bullish oil bet drop seen as peak in Iran rally

A drop in bullish oil bets may signal that a rally in crude driven by concern over the standoff with Iran has peaked.

The number of options held by traders to buy Brent crude was 1.63 times higher than those to sell it on March 14, down from a seven-month high of 1.86 on March 9, according to data from the ICE Futures Europe exchange. Options on West Texas Intermediate, the most liquid oil contracts, show traders are paying less for insurance against large swings in futures.

Brent, the benchmark for half of the world’s oil, rose 18 percent this year through March 13 as Iran threatened to shut the Strait of Hormuz, a transit route for a fifth of the world’s oil. Prices slid as the U.S. and U.K. discussed a release of strategic reserves and Saudi Arabia, the world’s largest crude exporter, said it can make up for any shortage in global supply.

“We’re seeing the buying dry up,” Vince Lanci, managing partner and portfolio manager at Echobay Partners LLC, a commodity option-trading firm in Stamford, Connecticut, said in a phone interview yesterday. “People who are long options are still hoping to profit from a disaster. But you’re not seeing fresh money come in.”

Brent crude for May settlement rose as much as $1.50, or 1.2 percent, today to $124.10 a barrel in London. The April contract expired yesterday 1.1 percent lower and was down from an 11-month high of $126.22 on March 13. Open interest in calls, or options to buy Brent, was 389,651 contracts March 14, after reaching a record 462,920 on March 9.

WTI Crude

West Texas Intermediate was at $105.81 a barrel today, up 70 cents, after dropping 32 cents to $105.11 yesterday, compared with a $109.77 high Feb. 24 when Iran dismissed United Nations atomic inspectors’ concerns about its nuclear program. Implied volatility, a measure of expected price swings in futures and a gauge of options prices, for May WTI options sank to 26.2 yesterday from 30.89 on March 6, according to New York Mercantile Exchange data.

“There is a great number of investors that are contemplating the idea that the Iranian-Israeli conflict is going to happen, that’s what brought a lot of call buyers,” James Cordier, money manager at OptionSellers.com in Tampa, Florida, said in a phone interview March 1. “When push comes to shove, they are not going to cross the line. It’s mostly speculative buying of the calls.”

The Daily Sentiment Index, an indicator of small investor sentiment, was 68 percent bullish on crude oil as of March 14, according to Jake Bernstein, futures analyst and president of Network Press in Santa Cruz, California. That’s down from 96 percent Feb. 29.

Market Speculation

“There is still a lot of speculation in the market,” Bernstein said yesterday in a phone interview. “We’ve weeded a lot of that out by the decline we’ve seen over the past couple of weeks and I would say now we’re ready to go back up again.”

The U.S. and the European Union have imposed economic sanctions on Iran in an effort to persuade the Persian Gulf country to produce conclusive evidence that it has abandoned any efforts to develop nuclear weapons. Iran has said its nuclear program is for peaceful purposes.

U.S. President Barack Obama discussed a release of oil from America’s strategic reserve during a meeting in Washington on March 14 with U.K. Prime Minister David Cameron. Cameron and Jay Carney, the White House press secretary, said no agreement on a release was reached.

Saudi Arabia

Saudi Arabia can make up for any shortage in global supply, Oil Minister Ali al-Naimi said March 14, seeking to sooth investors concerned that oil flows will be disrupted.

“Saudi Arabia and others remain poised to make good any shortfall, perceived or real, in crude oil supply,” al-Naimi said at the biennial International Energy Forum in Kuwait.

The U.S. has received assurances from Saudi Arabia, the United Arab Emirates and Kuwait that they would raise output to help offset the effect of economic sanctions on Iranian exports. The three countries have excess capacity of about 2.32 million barrels a day, according to the Paris-based International Energy Agency.

Iran pumped 3.38 million barrels a day of oil in February, trailing only Saudi Arabia among countries in the Organization of Petroleum Exporting Countries, according the IEA.

Less Urgency

“The urgency to buy calls has diminished considerably over the past couple of weeks,” Ray Carbone, president of Paramount Options Inc. in New York and a floor broker on the Nymex, said in a telephone interview yesterday. A meeting between Obama and Israeli Prime Minister Benjamin Netanyahu on March 5 “has put what appeared to be a near-term Iranian strike maybe into the future a little bit more,” he said.

Obama told Netanyahu that “there is still a window” for a diplomatic solution to the confrontation with Iran.

Traders are showing less interest in wagering on higher prices. WTI call options betting on a 10 percent gain in May futures were 17 percent lower than puts that make money from a 10 percent drop. That’s a reverse from a week earlier, when calls were worth 12 percent more.

“I wouldn’t be surprised if we had a dip,” Carbone said. “There’s been a lot of put-buying recently. That may suggest a pullback.”