It’s come to this for the beleaguered oil market: a big bet that prices are about to sink to their lowest level in more than a year.
About $7 million worth of options changed hands Friday that will pay off if West Texas Intermediate crude falls beneath $39 a barrel by mid-July, according to data compiled by Bloomberg. WTI, which hovered around $46 Friday, hasn’t traded below $39 since April 2016, though it’s been dropping like a stone in recent weeks.
More than 14,000 August $39 puts changed hands, almost 20 times the number of contracts previously outstanding for the bearish option.
The trade was a sign of the “crescendo of negativity” that’s washing over the oil market, said James Cordier, founder of investment firm Optionsellers.com in Tampa, Florida.
Prices have plunged about 13 percent in the last three weeks, amid fears that Oped-led production cuts aren’t doing enough to stem a global supply glut. For Friday’s bet to work, prices would have to match that drop in the next few weeks, during a time when summer driving typically pushes demand higher, Cordier said by telephone.
“That’s just a huge speculative bet that tells me that the fear is at its heights and we’ll probably see oil recover,” he said. “It’s a hell of a lottery ticket that the market’s going to keep falling.”
Oil closed near $46 a barrel in New York, back to levels last seen before the Opec deal, as the shale revival appears to be making the group’s cuts ineffective.
After dipping below $44 Friday, futures pared this week’s decline to 6.3 percent. But, prices remain near their lowest since the Organization of Petroleum Exporting Countries signed a six-month deal to curb production in November. Meanwhile, shale drillers are pressing ahead with their longest expansion since 2011. Market volatility and trading volumes surged.
“What we’ve seen in terms of the rebound today is really just a bit of a correction following an oversold market over the past several days,” Michael Tran, a commodities strategist at RBC Capital Markets in New York, said by telephone.
Opec’s curbs drove oil above $55 at the start of the year, encouraging US producers to ramp up drilling. The result has been an 11-week expansion of American production, the longest run of gains since 2012. Prices are still more than 50 percent below their peak in 2014, when surging shale output triggered crude’s biggest collapse in a generation and left rival producers such as Saudi Arabia scrambling to protect market share.
Oil market volatility, as measured by the CBOE/Nymex Oil Volatility Index, jumped to the highest level since December. The US benchmark’s 14-day relative strength index hovered near 30, signaling the commodity is oversold.
West Texas Intermediate for June delivery rose 70 cents, or 1.5 percent, to settle at $46.22 a barrel on the New York Mercantile Exchange. Total volume was about 70 percent above the 100-day average. The contract sank 4.8 percent Thursday.
Brent for July settlement climbed 72 cents to settle at $49.10 a barrel on the London-based ICE Futures Europe exchange. The global benchmark crude traded at a premium of $2.50 to July WTI.
Oil’s retreat Thursday stoked declines in other commodities from iron ore to industrial metals. The deterioration in sentiment also carried through to the currency market.
The selloff was also due to “broad macro concerns regarding the Chinese economy. The entire commodity space was weaker,” Tran said.