(Bloomberg) — A flurry of bets on Brent crude falling below $60 a barrel this year changed hands in recent days, a sign investors are hedging against the risk of another large production hike from OPEC and its allies.
Thursday’s trading saw a spike in activity in December $55 and $60 puts, with the combined open interest in both options ballooning to the equivalent of 120 million barrels of crude. Trading volume for the $55 puts was the highest since early April, when OPEC shocked markets with a supply increase three times bigger than originally scheduled. Brent crude is currently trading near $65 a barrel.
The activity signals strengthening investor conviction that Brent will breach the key $60-a-barrel psychological level by the end of the year, when many analysts and traders expect a global glut of crude to form. Oil has been locked in a tight range since early August as traders try to reconcile increased OPEC output with tightness in US markets and a potential escalation of sanctions on Russia.
In recent days, signs have emerged that another major production increase may be in the offing. Bloomberg reported that OPEC leader Saudi Arabia wants the group to consider reviving more oil production ahead of schedule to help reclaim market share. Investors are now pricing in a 77% chance of OPEC deciding to revive more output ahead of its scheduled return, according to the CME FedWatch Tool.
December $60 puts now go for $1.35 each, compared to 59 cents just three days ago, highlighting the rush for protection ahead of the alliance’s scheduled video conference on Sunday. Broader oil options pricing had already taken a more pessimistic tilt as the summer driving season came to an end, with puts fetching the biggest premium over bullish calls since early August.
Oil sliding below $60 a barrel would be a major win for President Donald Trump, who has repeatedly tried to jawbone prices lower. His trade war has also weighed on prices by threatening to hurt energy consumption.
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