Oil's recent break-out to $80 per barrel for the first time in a year was attributed to that old saw 'dollar weakness' and a higher-than-expected draw on US gasoline stocks last week. Yet as Olivier Jakob of consultants Petromatrix reveals, once oil gets above $75 another wholly technical reason for prices to climb even higher emerges. It's the shape of the oil options price curve on Nymex, the US commodity derivatives exchange that sets the benchmark global oil price.
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Petromatrix finds that while December 2009 Nymex oil options display a net 'put' at prices ranging up to $70 per barrel, from $75 upwards they display instead an increasingly large net 'call' obligation on options writers. The net position at $75 is a call of 25,378 contracts, but at $80 the net call rises to 140,772 contracts, and then 520,543 contracts at $100. Call options confer upon the holder the right to buy at the specified price, so as oil prices rise, the likelihood of them exercising that right increases. The writers of those options then feel more exposed to the risk of having to deliver on the calls, and their own buying of actual futures contracts to hedge this risk emerges as a fresh source of upwards pricing pressure on the December futures contract.
Some observers still insist that non-fundamental factors such as financial investor positioning in Nymex options - dominated by banks - cannot possibly move the oil price by much. However, options activity certainly played into oil's obvious bubble up to $147 last year, including anomalous waves of call options being exercised unusually far ahead of the June strike date.
