The number of traders with bullish positions on oil options is growing fast amid soaring international benchmarks.
Citing analysts and market data, Reuters reported that the influx of bullish options traders takes place as oil prices reach highs last seen a decade ago.
According to the data cited, between January 19 and February 9, the average volume of oil options traded in the United States on the CME exchange stood at 126,000 daily. Since then, the report noted, the average daily volume of oil options trades has increased to 178,000 contracts, with the first two days of March seeing daily volumes of over 240,000 contracts.
What this increased appetite for oil options signals is expectations that oil prices will continue higher, which is indeed the most likely development in the immediate term.
Russian oil export volumes have dropped dramatically in the aftermath of the Ukraine invasion and the series of sanctions that Western powers imposed on Moscow as a response. According to data from Energy Intelligence, Russian exports of crude have dropped by a third—around 2.5 million bpd—since the start of the sanctions.
This comes on top of an already tight oil market globally and an unwillingness on the part of OPEC to step up production ramp-ups to rein in prices. Russian oil exports, in the meantime, are likely to plunge even further as the West tightens the sanction noose, leaving traders and other buyers uncertain whether trading with Russia is worth the risk of violating some sanction or another.
Meanwhile, in the United States, there is growing pressure on President Biden to suspend Russian oil imports into the country. In fact, a bipartisan group of legislators has already introduced a bill proposing the suspension of these imports.
"I don't believe this country should be importing anything from Russia," Montana Senator Jon Tester said, as quoted by Reuters. "It will send even a bigger message that the United States is in this with Ukrainians for the long haul."
By Charles Kennedy for Oilprice.com
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The reason behind this breath-taking surge is a growing concern in the market that the United States and the European Union (EU) could be on the verge of sanctioning Russian oil and gas exports.
There is also the possibility that Russia might retaliate against sanctions by halting its global oil and gas exports. Russia exports 8.0 million barrels a day (mbd) in total composed of 5.0 mbd of crude and 3.0 mbd of refined products.
Either case, it will cause Brent crude to rise further to even $120 and gas and LNG prices to hit unheard of levels. This will very adversely affect the global economy particularly the economies of both the United States and the EU.
The United States is the world’s second largest importer of crude oil after China importing an estimated 9.0 mbd on average in 2021. It is highly vulnerable to oil price shocks.
The EU which is dependent on Russian gas supplies for more than 40% of its needs and 30% of oil will be the biggest loser worsening an already damaging energy crisis and impacting very adversely on the EU’s economic growth this year.
Moreover, the entire LNG exports of the United States, Qatar and Australia could hardly replace Russian piped gas supplies to the EU amounting to 200 billion cubic metres (bcm) and 15-16 million tons of LNG. The EU’s LNG import infrastructure is very limited. Furthermore, Russian piped gas is far cheaper than LNG. Russia can still sell its gas and oil exports to China.
If we are to believe the claim that Russia’s oil exports are plunging, the financial loss would be within acceptable levels since rising oil prices will to some extent offset declining exports.
Even without the Ukraine conflict, the global oil market was in its most bullish state since 2014 whilst global oil demand has already entered a super-cycle phase which will take Brent crude to $120 a barrel in the next few years.
To this can be added a shrinking of global spare oil production capacity including OPEC+’s.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London