By Amanda Cooper
LONDON (Reuters) - Oil investors are paying more to bet on a rise in the price of crude than on a decline for the first time in six weeks, as they prepare for the possibility of a surprise from OPEC, which is due to release its supply policy decision on Friday.
Hedge funds have cut bullish bets on crude oil to their lowest in five years, with gloom deepening over the global economy's ability to grow fast enough to absorb the world's excess supply. [CFTC/]
A "no cut" from OPEC is comfortably built into the current oil price, which has halved this year to around $45 a barrel, given Saudi Arabia's financial ability to withstand sub-$50 crude and little likelihood of major non-OPEC producers, such as Russia, joining any coordinated effort to cut output.
In the last three weeks, investors have increased their holdings of options to buy Brent crude futures at between $50 and $60 a barrel by more than 15 percent. <0#LCOF6++>
The price of a near-dated out-of-the-money, call option, which offers its holder the right to buy above the current Brent futures price has surpassed that of near-dated, out-of-the-money put options, which offer the holder the right to sell below the current prompt price.
Nearly half of total open interest in January Brent options is clustered in just six different calls, all with the option to buy at levels above $52 a barrel.
"The question is whether some people are taking the bet, by using out-of-the money options, that OPEC pulls a rabbit out of their hat," BNP Paribas (PA:BNPP) global head of commodities strategy Harry Tchilinguirian said.
RARE OPTIONS SHIFT
Over the last five years, out-of-the-money prompt calls have traded at a premium to puts roughly 20 percent of the time.
In the last year, this frequency has dropped to just 4 percent of the time, reflecting investors' desire to protect against a near-term drop in the oil price is greater than their willingness to bet on a near-term rise.
Tchilinguirian, whose bank believes the oil price has found a floor around $40 a barrel, said the consensus may be for OPEC to stick with its strategy of pumping hard to retain market share, but this shift in positioning in the options market could reflect a growing unease with trading based on that consensus.
"The consensus is baked in for the status quo, the current situation. Maybe the devil will be in the details and for those who believe some accommodation may take place, that lessens the bearish outcome for next year," Tchilinguirian said.
Market players have speculated that a surprise outcome of the OPEC meeting on Friday could range from a verbal intervention to pledge to accommodate additional Iranian barrels when sanctions are removed, to a very unlikely scenario of an outright Saudi-led output cut.
In terms of what this switch in positioning means for the Brent price, Morgan Stanley (N:MS) said it believed a renewed decline may materialise as a result of these call options expiring unexercised, even in the event of an OPEC-driven bounce.
The more an option inches towards profitability, the more of the underlying crude futures contract both the holder and the seller of that option must buy or sell to mitigate the risk of the market moving against them.
This process is known as "delta hedging" and, in the case of unprofitable calls, could lead to the sellers of such options unwinding those hedges by selling the Brent crude futures they had accumulated to manage their options risk.
"Not only could we see issues with all these calls expiring, but the drop in their value may force counterparties who were buying underlying contracts as a delta hedge to unwind those positions. The loss of this delta could put modest downward pressure on prices," analysts at Morgan Stanley said.