The Oil Market Gets Bullish as Trump Doubles Down on Iran Sanctions

(Bloomberg) -- Crude market gauges suggest oil traders are betting on further price increases after the Trump administration’s decision to halt waivers from U.S. sanctions on Iran. 

Options traders are paying a premium for bullish call options, while time-spreads that provide a measure of market strength have soared after Trump’s latest move to try to drive the Persian Gulf state’s oil exports to zero actually stoked positive market sentiment, despite his well-chronicled distaste for high oil prices.

Though crude prices struggled on Tuesday to add significantly to Monday’s gains, here’s how some of the market’s most-watched gauges have jumped following the decision.

Spread Surge

Crude’s renewed strength is best glimpsed in the spread between the nearest two December contracts. WTI for December 2019 settled at a premium of more than $4.50 to WTI for December 2020. That spread, which is a favorite trade of oil hedge funds and is often used as a gauge of market health, has rallied about $6 a barrel since the end of last year, when it traded in a bearish contango structure.

“It’s predominantly being driven by bullish sentiment in the market from Trump’s Iran decision,” said Warren Patterson, head of commodities strategy at ING Bank NV, adding that figures also suggest the move is being aided by producers hedging their output.

The Oil Market Gets Bullish as Trump Doubles Down on Iran Sanctions

Call Premium

At the same time, oil options traders have turned more positive than at any time in the last six months. The premiums they’re paying for bullish Brent call options surpassed those for bearish put contracts early on Tuesday as traders sought to protect against the risk of higher prices. Brent trading was dominated by calls on Monday, with volumes hitting their highest level since November as more than 17 million barrels worth of contracts that would profit a buyer if Brent rises above $80 before the end of next month changed hands.

The Oil Market Gets Bullish as Trump Doubles Down on Iran Sanctions

Physical Strength

While spreads along the curve have been firming, short-term gauges are already indicating tighter supply. The nearest differentials for both Brent and WTI are trading in a bullish backwardation, suggesting that prompt physical balances are already tight, even before more Iranian supply is lost to the market.

“The loss of Iranian barrels makes a tight oil market even tighter,” Sanford C. Bernstein & Co. analysts including Neil Beveridge wrote in a report. While Saudi Arabia will likely offset any lost Iranian supply, that will lead to more limited spare production capacity in the oil market, they said, and as a result “the risks to oil prices continue to point to the upside in the short-term.”

The Oil Market Gets Bullish as Trump Doubles Down on Iran Sanctions

See the Futures

Still, any near-term rally in crude prices adds to the the risks of surging U.S. shale production. American output is currently near a record, at 12.1 million barrels a day, and any increases in long-term crude prices could lead to output surging even further, Goldman Sachs Group Inc. analysts including Damien Courvalin wrote in a report. “We view long-dated prices as holding the key for a potential further rally in oil prices,” they said. If longer-dated crude prices did rally, crude’s uptick “would likely be both modest and self-correcting on both rising spare capacity and shale supply.”

The Oil Market Gets Bullish as Trump Doubles Down on Iran Sanctions

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