By Devika Krishna Kumar and Amanda Cooper
NEW YORK / LONDON (Reuters) – Oil traders have insisted that the US crude oil would rise to $ 100 a barrel by next year, a milestone that until recently was considered by many unthinkable due to a record growth in American production and a relatively flat global demand.
But the imminent return of US sanctions against Iran and bottlenecks that prevented American oil from being marketed led to a rally in which oil prices for the benchmark rose to four-year highs.
While large producer countries say the supply is sufficient, hedge funds and speculators are increasingly skeptical about this argument, betting that the market could rise further because the sanctions on Iran's crude exports will return on 4 November.
The bullishness is visible on the American options market. The number of open positions on $ 100 WTI call options in December 2019 – bets on futures that hit that price by the end of 2019 – has increased by 30 percent in the last week to a record of 31,000 matches, according to CME data.
"In the past two weeks, there is much more evidence that even some of the larger customers – India and China – will not buy Iran's crude oil from November," said John Saucer, vice president of research and analysis at Mobius Risk Group.
As a result, he said: "These sanctions are likely to be much more effective than people even thought."
Total exports from Iran dropped to 2 million barrels per day (bpd) of 2.8 million bpd in September, according to the Institute of International Finance.
Estimates for how much of Iranian exports can be affected range from 500,000 bpd to 2 million bpd, and uncertainty about the impact could eventually promote price fluctuations in both directions.
Brent crude oil, the international benchmark, rose above $ 86 a barrel on Wednesday and US Western Intermediate (WTI) in the US hit $ 76 a barrel, both four years high.
The decision by the Trump government to extend the sanctions against Iran led to a sharp shift of the Organization of the Oil-exporting Countries. After approximately 18 months of inventory, OPEC agreed to increase production.
Furthermore, Saudi Arabia and Russia recently decided to stimulate the offer privately before allowing other OPEC countries to soften the US President Donald Trump, who has focused his anger on rising prices.
The oil markets expect OPEC and Russia to compensate for shortcomings in the supply. US production, which has a record of 11.1 million bpd, can not replace crude oils from the Middle East, such as Iranian grades, in Asian refineries. In addition, transport bottlenecks are restrictive US exports.
"We continue to tilt price risk to the top and do not exclude a peak in the oil price of up to $ 100 / barrel," said UBS analyst Giovanni Staunovo.
Open interest in $ 100 December 2018 Brent call options, which expire at the end of October, are currently more than 50,000 lots, more than any other strike price for that month, according to InterContinental Exchange data.
(For an image on & # 39; Traders gamble on $ 100 oil as Iran sanctions approach & # 39; click https://reut.rs/2Oy7mvY)
Implicit volatility for highly optimistic Brent options that expire after the resumption of 4 November sanctions has overtaken those for very bearish options, indicating an increased demand for such bullish bets.
This spread, or distortion, has been at its strongest since mid-July.
Open interest on STI calls of $ 100 December 2018, which expire mid-November, has risen to about 15,000 lots in more than four months.
Many traders said that these $ 100 bets were faced with a long-term interest rate. Option contracts used to speculate on far-fetched results are usually inexpensive and if the set of raw currencies ceases, those positions will be worthless. But even a short-term jump could make these options more expensive and holders could sell them at a profit.
(Reporting by Devika Krishna Kumar in New York and Amanda Cooper in London; Editing by Cynthia Osterman)