Oil options lure banks on lowest volatility in 17 years

“It’s a very good time to buy options.”

One Direction

“The market is moving in one direction with a lack of price variance,” said Schork. “But what happens when the buying stops? If momentum stalls, due to a lack of buying interest, then given that the market is already leaning in one direction, you risk a stampede as bulls look to exit their positions.”

Crude is unlikely to plunge as the nuclear dispute with Iran, attacks in Algeria and conflict in Syria support prices, said Torbjorn Tornqvist, chief executive officer and founder of Gunvor Group Ltd, an energy trading company.

The “geopolitical situation and particularly in the Middle East, Iran, Iraq, Syria, North Africa, is extremely worrisome,” Tornqvist said in an interview in Davos on Jan. 24. “All these factors will create volatility. Given the situation I don’t see a significantly lower oil price. The Iranian situation is the key.”

Iran will meet with officials from the International Atomic Energy Agency in Tehran on Feb. 13 to discuss access to its nuclear facilities, which western governments said are engaged in building an atomic weapon. The Islamic republic denies the charge, saying its nuclear program is for civilian use and that international sanctions on its oil exports are unfair.

Upside Risk

“The risks for oil prices are to the upside,” said Eugen Weinberg, head of commodities research at Commerzbank in Frankfurt. “There may be value in options on Brent crude climbing toward $130 a barrel in case of conflict escalation in the Middle East.”

Algeria’s In Amenas gas-processing plant was attacked by militants linked to al-Qaeda on Jan. 16 in a four-day stand-off that left at least 38 workers dead. Several European governments urged their citizens to leave the Libyan city of Benghazi on Jan. 24, citing a threat to westerners.

“Major risks have been priced out but the market has overshot,” Archbridge’s Kocayusufpasaoglu said of the drop in implied volatility.

Bloomberg News

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