Oil traders are buying protection against a 2008-style price collapse with options that gain value if U.S. crude plummets by year end.
Exchange data reveal a surge of interest in options that convey the right to sell oil at $50 (U.S.) a barrel by December, almost $40 below current prices. Open interest has risen by 60 per cent in the past month, making it the second most widely owned December crude put on the New York Mercantile Exchange.
Buyers include money managers such as hedge funds which, despite an overall bullish outlook, want to avert catastrophe if the market suffers a repeat of 2008, when the financial crisis drove West Texas Intermediate down to $32 a barrel in the year's second half.
Fears have grown more acute since August, as evidence of a cooling economy, along with the U.S. debt ceiling impasse, has rattled confidence.
Global oil demand is still expected to increase to a record 89.5 million barrels a day this year, though the International Energy Agency last month shaved 100,000 b/d from its forecast because of high prices and slowdown concerns.
Wall Street forecasters, most of them blindsided in 2008, see U.S. crude averaging $97 a barrel in the fourth quarter, according to a Bloomberg survey of 32 analysts.
Interest in $50 puts does not necessarily mean traders think oil will fall below a level that Saudi Arabia, the world's largest exporter, needs to balance its budget. The price of a single put contract has more than doubled to 19 cents a barrel since August, but would rise to 80 cents if crude bottomed out at $75 a barrel, said a commodities hedge fund manager.
This means an investor who spent almost $200,000 on 1,000 options contracts could sell them for $800,000 if crude futures reached $75 a barrel. NYMEX December WTI futures on Wednesday jumped $2.89 to $89.59 a barrel, while ICE December Brent gained $2.49 to $113.77 a barrel.
"It's a very cheap play if you believe in downside," the manager said. "I don't think anybody who bought the $50 put actually thinks it's going to end up in the money."
Other buyers have been Wall Street banks that earlier sold puts to oil producers at higher strike prices and need to limit their risk.
"I don't think people are saying, 'Oh my God, we are going be at $50 in the next couple of months.' It's a protective strategy," said Mark Benigno, managing member at HCEnergy, a New York oil options dealer.