- Recession risks pushed oil prices down in June, with Brent crude falling 7.8%.
- An increasing number of commodities traders are betting that prices could fall another 25% by December.
- The price of a barrel of crude oil fell from $139 to $39 during the Great Recession of 2008.
The oil price is heading for its first monthly loss since last November, amid fears of
and the destruction of demand have hit sentiment, and the options market is showing a growing number of investors turning increasingly bearish.
The factors that drove oil to a decade above $140 a barrel a few weeks ago — rising demand and a potentially massive supply shortage thanks to sanctions against Russia over its war in Ukraine — are beginning to shift.
Sky-high inflation is forcing central banks around the world to raise interest rates, which can dampen demand for commodities, and increase the likelihood of a recession.
Recessions often lead to a drop in oil prices as consumer spending falls, reducing fuel demand. The price of a barrel of crude oil fell from $139 to $39 in less than a year after the 2008 financial crisis.
While oil rose to nearly $140 a barrel after Russia invaded Ukraine in February, Brent has fallen 7.8% to $107 a barrel this month as investors worry about an economic slowdown.
“Concerns about recession and its potential negative impact on demand” [are ripping] through cyclical commodities such as oil,” said Saxo Bank strategists.
The derivatives market shows investors flocking to put options — a contract that gives the owner the right, but not the obligation, to buy a particular asset at a fixed price on a specified date.
Backed by some of the largest U.S. energy companies, the SPDR Energy Select ETF (XLE) has been one of the most notable performers this year, gaining 33% versus a 12% loss in the S&P 500, thanks to up to rising oil prices. But investor interest in puts reflects a creeping bearishness, even in this sector.
Total holdings of puts on XLE have reached an all-time high of 2.02 million lots, according to data from the New York Stock Exchange, and more dramatically, trading of those options has surged this month.
Data from Bloomberg shows that daily trading volume in XLE rocketed to a peak of 839,000 lots on June 17. That volume dropped to 212,257 lots on Wednesday, but that leaves the 20-day moving average above 190,000 lots – its all-time high.
According to Wall Street banks such as Morgan Stanley and Wells Fargo, the Federal Reserve’s 75 basis point hike last week increased the likelihood of a recession. It has also made commodity traders significantly more skittish, analysts say.
Rising fears of a recession have weighed on risky assets, and comments from [Fed chair] Jerome Powell… wouldn’t have helped,” said Warren Patterson, ING’s head of commodity strategy, referring to Powell’s recent Congressional testimony.
Some investors are even seeing a scenario where the oil price falls by another 25% by the end of the year.
Options on Brent oil futures – the global benchmark price – show traders are beginning to ramp up their bets that the current price of around $100 a barrel may not last until the end of the year as rising interest rates increase demand for everything from crude. slow down, from gasoline to jet fuel.
The second most popular option right now for Brent futures expiring in December is a put that gives the holder the right to sell at $85 a barrel, down from $111 right now, based on data from the Intercontinental Exchange. .
Holdings, also known as open interest, in $85 puts have grown to about 21,795 lots from 19,360 lots a month ago. Meanwhile, investors have built positions in puts at $75, which would be down about 25% from current levels, and open interest has grown to 17,538 lots, from 15,684 a month ago.
The most popular option for December is still a $120 a barrel call, but just barely. At 23,806 lots, it is neck and neck with positions of fairly bearish puts.
Read more: UBS: Recession Risks Rise – But Make These 6 Investments to Protect Your Portfolio From the Downturn