Big Options Bets May Fuel US Oil’s Bumper Discount to Brent

(Bloomberg) — In a niche corner of the oil options market, traders have quietly amassed a large number of positions betting that the gap between the world’s two main oil benchmarks will keep growing.

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More than 30,000 positions are open for the rest of the year, wagering that the spread between West Texas Intermediate futures and Brent would trade beyond $8 a barrel, and even $10. The contracts could compound a recent blowout in the WTI-Brent spread, which this week was the widest intraday since crude briefly turned negative in 2020.

With several of the options coming “into the money” or approaching the levels where the bet would be highly profitable, some dealers are being forced to cover their risk by selling the spread, exacerbating the move further, traders said.

Many traders took long-shot bets starting late last year that WTI would slump relative to Brent if the US banned crude exports in an attempt to curb surging energy costs and tamp down inflation.

The price relationship between the US and global crude benchmarks is a closely watched metric in the oil market since it forms the basis for hundreds of millions of dollars worth of shipments and trades every day.

This week, the measure touched $9.75 a barrel as Europe scrambles to replace Russian supplies, while US markets remain cushioned by strategic reserve releases and softer fuel consumption. Before the blip in 2020, the last time the spread traded at such extreme levels was in 2018 and 2019 when severe pipeline constraints trapped barrels in the Permian Basin — the largest oilfield in the country.

While the spread could be volatile in the short-term, once the scheduled releases from the US Strategic Petroleum Reserve end, the gap is likely to narrow again, said Giovanni Staunovo, commodity analyst at UBS Group AG. “I would expect that we are back at $3 a barrel by December unless they sell more SPR crude,” he said.

To be sure, as the -$10 bearish put options have gained in value, some of the positions have been closed out. On Tuesday, about 2,000 such contracts were traded and open interest fell.

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