Oil hasn’t yet climbed back to $100 per barrel, but options traders are increasingly setting their sights on another target—$200. The most actively traded Brent crude options contract on Thursday was an option to buy Brent at $200 in March 2023.
About half of the contracts to buy oil at that price appeared to be placed by one buyer who spent about $810,000 on the options, according to Robert Yawger, the director of energy futures at Mizuho Securities USA. But that buyer isn’t the only person making a bet that oil prices will hit $200, along with other bullish bets on where oil goes in 2023. “There have been people dipping their toes into those higher [options strike prices] over the last couple of days,” Yawger said.
Overall, oil options traders are positioned more aggressively than ever before. The ratio of bullish to bearish bets in the options market is wider than any time in recorded history, according to Bloomberg.
On Friday, Brent futures were up 3.9% to $98.36 per barrel on rumors that China may relax its Covid policies. To get to $200, of course, a lot more would have to happen. In recent weeks, oil prices have been held back by recession fears. Oil prices have never risen above $150 per barrel, and it would be unlikely to in a global recession. But theoretically the right set of circumstances could push oil to new highs—and there are a set of factors coming together in the next couple of months that look very bullish.
First, the European Union plans to stop all oil imports from Russia on Dec. 5, and is looking to cap the prices at which Russia can sell that oil elsewhere. Russia is already selling more oil to Asia, but the ban and price-cap are likely to reduce its exports and decrease overall supply by up to one million barrels per day.
The U.S. has helped increase oil supply this year by selling oil from its strategic petroleum reserve at a rate of nearly one million barrels per day starting in May. Those sales have held oil prices down. But the sales are expected to shrink this month and then end in December. Congress previously mandated another sale of 26 million barrels that’s expected to end by October 2023.
JPMorgan analyst Natasha Kaneva expects those barrels to be sold in the first quarter of 2023. After that, the reserve will be down to 348 million barrels—the lowest since 1983, and half the size at the start of 2022. Kaneva expects the Biden adminstration will have to release more from the reserve to hold oil prices down, but he could face pushback. Congress has said that the reserve must stay above 252.4 million barrels.
U.S. oil supplies have risen this year, but lately production growth has stalled. Government data show that U.S. production dropped to 11.9 million barrels per day last week, tied for the lowest level in months. Supplies of products such as diesel and heating oil in the U.S. are at multiyear lows, meaning there’s not much excess supply to fall back on.
Meanwhile, oil demand could rise soon if China really does relax its Covid rules, allowing people to travel more freely. Elsewhere in the world, oil demand has stayed relatively strong despite an economic slowdown.
With supply likely to drop, and demand ramping up, $200 a barrel still sounds like an outlandish number but it’s not an impossible one.
“$200 by March option expiration on Jan. 26, 2023?” wrote Yawger in a recent note. “Unlikely, but it is a lot happening at once.”
Next month could be the biggest test for oil markets since the Covid lows of April 2020. “Anything’s possible in December,” Yawger said.
