A big chunk of new speculative money that has poured into energy futures has gone into options, which can now play a bigger role in driving the ups and downs in the price of crude oil.
In November last year a mass of option bets on $100 oil came close to pushing prices to that level. Now a large number of options are betting oil could fall to $80 by June.
There are currently around 63,863 "put" option contracts betting on a fall to $80 in June this year, 37,483 option contracts betting on a drop to $85 and 28,100 betting on $90, according to data from the New York Mercantile Exchange (NYMEX), where U.S. crude oil futures and options are traded.
"It is a relatively new thing," said Olivier Jakob of oil consultants Petromatrix. "Options have always been traded, but the volume is something relatively new and that is why it is becoming more of a market factor."
A call option gives the investor the right to buy an underlying futures contract at a set price by a certain date, while a put option gives the right to sell.
Large option positions can act as a magnet that draws the futures price towards the option price. "When you get within $2-3 away from the option price you can start to accelerate towards that strike price," said Mike Wittner, oil analyst a Societe Generale.
This is because as prices head towards $80 this triggers selling of futures by the firms that sold the $80 "put" options who are under more pressure to hedge all of their exposure.
Bets or Hedges
But the option activity also reflects hedging by oil producing companies that have become big option users.
"As we've been in the $100 vicinity there has been some producer hedging to try and lock in the high prices," said Wittner. "Producers are buying puts and selling calls, that would let them profit from falling prices. That's a straightforward hedge," he said.
Options can be a cheaper way to hedge than using crude oil futures, which require large margin payments to cover any open positions.
With options you can limit your cost to the premium to buy the option and you are not as exposed to the large volatility of the futures prices, Jakob said.
The large number of option bets on $80 oil also could suggest a more bearish mood among investors. Oil prices hit record highs above $100 this week, but earlier in January slipped back on fears of a slowdown in top energy consumer the United States that could hurt the global economy and weaken booming oil demand from China and India.
But analysts point to increased investor activity in oil futures several years ahead as a sign that faith in a long-term bull market in oil remains unshaken.
For 2010 to 2016, prices are trending upwards towards $97 a barrel from about $95 in 2011, according to Reuters graphics.
"There is some evidence of that coming through the open interest data," said Jakob. "There was an increase of 6,479 contracts on the WTI NYMEX Financial contract and all done for December 2010 and forward," he said.
An increasing number of fund investors seem to be active in the "out" years.
"Anecdotally, the number of funds involved five years forward was around half a dozen two or three years ago, whereas more recently people say it's dozens," Wittner said.