Oil Traders Brace for Upside Risk on Mideast Turmoil

The oil market paused to catch its breath at the end of this wild trading week, but prices for the most active Brent and WTI crude contracts are still up over 10 percent since last Friday — and there's no sign that Mideast uprisings or calls for regime change in many countries in the region will cease over the weekend. So oil traders are bracing for more — perhaps much more — upside risk.

A commodities trader at the New York Mercantile Exchange.
Photo: Oliver Quillia for CNBC.com
A commodities trader at the New York Mercantile Exchange.

Despite a drop from Thursday's highs, U.S. oil prices are still just a few dollars shy of $100 a barrel.

"There are more Middle East problems cropping up — in Tunisia, concerns Iran is supporting demonstrators — so traders just want to square their books on a Friday afternoon and take another look the following week," says George Gero, vice president of global futures at RBC Capital Markets.

Oil traders may have breathed a sigh of relief as Saudi Arabia, the International Energy Agency and United States said they'd be willing to step in and help make up any shortfall from the disruption in Libyan oil supplies. Also margin increases from the CME Group and Intercontinental Exchange on crude futures helped to dampen some of the speculative fervor in the market.

But volatility will continue in the week ahead. The "huge bid" on implied volatility in the front month crude options, especially in $125 calls, will be watched closely next week, says trader John Netto, president of M3 Capital.

Technically speaking, Barclays noted that the sentiment index for oil has reached "bullish extremes." Often that signals a top in oil prices, but it is not necessarily true when geopolitical uncertainty is so high, traders say.

"Maybe oil just trades sideways a few weeks as sentiment becomes more neutral," says sales trader Gregory Glatt, managing director at Dominick & Dominick. But he certainly doesn't think the oil rally will pause for long.

"This is just the start of a larger, broader oil move as the dominos fall over in the Middle East," Glatt says. "Maybe it takes a week, maybe it takes months, but the dominos are falling and oil has shown there's only one direction it goes when that happens.??"