THE TARGET: $100/BBL TO 2018

The prospect of a return to $100-a-barrel crude is tempting some to bet against the bearish consensus in the oil market.

One or more traders have resumed buying call options that pay out if benchmark US crude futures surpass $100 by the end of 2018. Call options give holders the right to buy oil at a set price by a certain date.

Open interest in these options has risen to the equivalent of 2.7m barrels, nearly trebling from the start of the month.

The bullish positions run counter to the downbeat sentiment that pervades the oil market. Despite cutbacks in drilling, the price of West Texas Intermediate crude for December 2018 delivery was $64.25 a barrel on Wednesday. This specific futures contract last traded above $100 a barrel in mid-2011, while spot US crude oil was at that level last July.

Money managers last week had the biggest gross "short", or bearish, position on record in WTI, data from the Commodity Futures Trading Commission reveal. Analysts' median forecast for oil in 2018 is $75 a barrel, according to a Bloomberg survey.

Nevertheless, the call options are relatively cheap at $2.36 a barrel and have more than three years to pay out in what is a notoriously volatile market. The last time US crude rose from $64 to $100, it took just 20 months.

Chris Thorpe of CTA Financial, a commodity trading adviser, said the market was abuzz with speculation that a commodities hedge fund had bought the options, even as it had made money on bearish bets on oil to be delivered this year.

Owning such call options "can be a very good strategy", Mr Thorpe said. "It takes advantage of the low premium cost, and often models undervalue these things due to liquidity drying up when markets move."

The bearish consensus has developed as US shale drillers continue to expand output, a trend reinforced in data released on Wednesday. US crude oil production was 9.422m barrels a day last week, the highest since the early 1970s.

US crude oil stocks rose by 8.2m barrels in the week to 466.7m barrels, covering about 30 days of refinery demand. At Cushing, Oklahoma, the tank complex where WTI futures are delivered, stocks rose 1.9m barrels to a new record 56.3m.

After the report Nymex May WTI pared gains to trade at $47.79 a barrel, up 28 cents. ICE May Brent crude also eased but remained 34 cents higher at $55.45 a barrel.

As oil crashed last December in response to Opec's decision not to curb output, the Financial Times reported on the appearance of bearish put options that pay out of US crude falls below $40 a barrel by December 2015. Open interest in these contracts has also climbed, equalling 21.3m barrels for options with a $40 strike price and 27m barrels for options paying out below $35 a barrel.

WTI dropped to $42.03 last week, a fresh six-year low, but has since rebounded as the dollar weakened in response to the Federal Reserve's move to set out a shallower longer-term path for interest rate hikes.

ft.com