U.S. crude oil futures prices fell by more than 6% on Monday, marking the largest one-day drop in over two years. Israel's avoidance of attacking Iran's oil or nuclear facilities signified a de-escalation of tensions in the Middle East, leading to a significant decline in oil prices. The substantial drop in oil prices rendered most of the contracts that traders had previously bought at a record pace for bullish oil price options now worthless.
The West Texas Intermediate (WTI) crude oil futures for December delivery at the New York Mercantile Exchange fell by $4.48, a decrease of 6.13%, marking the largest single-day drop since the 7.93% plunge on July 12, 2022, closing at $67.38 per barrel. The Brent crude oil futures for December delivery at the洲际交易所 in Europe fell by 6.09%, closing at $71.42 per barrel.
Over the weekend, Israel conducted a long-awaited bombing of Iran, an OPEC member, but refrained from targeting Iran's energy infrastructure, leading to a sharp drop in crude oil prices. This drop partially resulted in approximately 800,000 Brent crude oil December call options expiring unprofitably on Monday, as traders' impulse to guard against a surge in oil prices dissipated.
Most of the trading around the risks of conflict in the Middle East this month took place in the options market, surpassing the fluctuations in futures prices. Speculation that the attack could disrupt oil flows in a region that accounts for about one-third of the world's crude oil production drove the total number of Brent crude oil options held by investors to a historical high.
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Less than 10% of the contracts expiring on Monday were valuable. This means that since the earlier part of this month when Iran attacked Israel (prompting Israel to threaten retaliation), approximately 32 million barrels of $90 and $100 call options have effectively become invalid. Last Friday, nearly 22 million barrels of $75 options were worth about $35 million, while nearly 53 million barrels of $80 options were worth about $22 million, both contracts becoming worthless after expiring on Monday.
Scott Shelton, an energy expert at TP ICAP Group Plc, said, "For me, the Middle East is still a powder keg, but the urgency to trade oil may have ended in the long term."
Of course, not all hedges against price spikes have expired. There are about 130,000 undelivered call options for Brent $100 futures contracts for the first half of next year, an increase of about 70% from the end of September.
Some traders use options as a way to hedge the risks of their physical businesses, such as producing or consuming oil, while others use options as a relatively cheap way to bet on the direction of oil prices or volatility. Traders also made a last-ditch effort to cash in on short bets before the contracts expired, with over 20 million barrels of December $70 put options changing hands on Monday. This reduced the skew (the premium of bullish call options over bearish put options) to the lowest point in nearly a month, after the indicator had surged to the most bullish level in over two years this month.
Shelton said, "Geopolitical risks have kept bears out of the market, which is not as bearish as expected. They need to participate, which means any significant rise will be sold off."