Crude on the New York Mercantile Exchange whipsawed between $105 and $113 a barrel last week, breaking from three weeks of relative calm. In the options market, traders have been laying big bets on two scenarios: more disruptions to supply sending prices higher, and weaker demand pulling prices lower.
Options, which give their owners the right to buy or sell oil at a fixed price, cost less to buy than a futures contract, but offer a payout only if oil reaches a certain price. They can offer a window into which way traders think prices are headed.
The options market currently is suggesting traders simply don't know. Peter Donovan, an options trader and vice president at Vantage Trading on the Nymex floor, said in recent weeks he has recently seen some options change hands that are worthless unless prices soar above $150 a barrel. Meanwhile, crude-futures trading volumes remain thin, indicating fewer investors are willing to make outright bets on oil prices.
"That just shows you there's some nervousness in the market," he said. "Guys just take a shot, buy a lottery ticket."
On the one hand, prices could continue climbing if unrest in the Arab world spreads beyond Libya to other oil-producing states. Some analysts have predicted prices could hit $200 a barrel if Saudi Arabia, the world's biggest oil exporter, is forced to cut production.
But a chorus of analysts are warning that high oil prices risk eroding economic growth and gasoline demand. The International Monetary Fund on April 11 said global economic growth would slow to 4.4% this year from 5% last year, with high oil prices threatening the recovery.
"Now the market has two countervailing factors," said Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas in London.
The uncertainty is showing up in the form of higher "implied" volatility in the options market. Implied volatility reflects the cost of options. When it rises, it can signal that traders are worried about big price swings. And it has been rising for both call and put options, a sign of uncertainty over which way prices will move next.
Call options give investors the right to buy the underlying contract at a set price by a set date, while put options give investors the right to sell. Traders who buy call options benefit from a spike in prices, while those who buy put options profit from a price drop.
Volumes for both West Texas Intermediate options and futures are lower than they were earlier this year, underscoring the nervousness among traders. During one trading session earlier this month, crude volumes on the Nymex even fell below those of Brent futures for the first time since last August. Trading volumes of Brent, the benchmark used in Europe and Asia, have remained steady over the last few weeks.
The number of outstanding options for May crude futures is greatest at $150 a barrel and $90 a barrel. That is a sign prices could become especially volatile around those levels as the holders of those contracts cash them in.
"The market is anticipating a pick-up in volatilty—sure, things have been quiet in the last month, but looking ahead we're not expecting that to continue," said Tim Evans, an energy analyst at Citi Futures Perspective.
Light, sweet crude for May delivery settled $1.55, or 1.4%, higher at $109.66 a barrel on the New York Mercantile Exchange on Friday. The crude futures are up 20% this year. For the latest updates PRESS CTR + D or visit Stock Market news Today
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