Trading Surge in Oil Options Creates a Whirl of Speculation
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Global oil options markets this week were the busiest since November after a flurry of buying from what appeared to be a large producer protecting against a drop in prices.
Trading on Monday was dominated by $60 puts -- which give the owner the right to sell oil contracts for the rest of 2019, with a total of 16 million barrels changing hands in June, August and September, ICE Futures Europe exchange data show. More than 8 million barrels of similar contracts traded in the over-the-counter market, said people familiar with the matter.
The buying spree continued Tuesday, people familiar with the matter said, with implied volatility for Brent August $60 puts -- a measure of how expensive they are -- also rising. Volume of puts was the highest since November, exchange data show. Brokers and dealers said increased activity seen in the U.S. swap data repository in recent sessions was likely tied to a major hedging program.
Some pointed to Petroleo Brasiliero SA, given the timing and size of the trades. Petrobras said in a 2018 filing that it hedged 128 million barrels of crude at an average price of $65 a barrel, buying the protection in February and March. It announced the hedge for the first time last year, joining Mexico as one of the biggest transactions in the oil market. Mexico spent $1.2 billion last year to protect its 2019 oil revenues from falling prices.
On Sunday, Petrobras CEO Roberto Castello Branco said the company’s best protection against periods of low prices in the international market are low production costs. But the company is willing to continue to use hedging instruments to protect part of the production from price variations. Contracts are analyzed on an individual basis and apply for just part of the production. Castello Branco didn’t comment on a specific contract.
"If I hedge at $60 per barrel and tomorrow the barrel is at $80, I’ll be sad. The opposite can also be true, and you can say, I’m glad I did it," he said in an interview with Bloomberg. "As we don’t expect an acceleration of the world economy, nor an acceleration for oil demand, we need to be prepared for lower prices."
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