Hedge funds bet on oil spike as Israel attack fears grow (REUTERS) By Barani Krishnan and Jonathan Leff NEW YORK 08/16/12 12:01am EDT)
Reuters News Service
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(Reuters) - Hedge funds are quietly laying new bets on a potential
spike in oil prices tied to the possibility of an Israeli attack on
Iran, skewing the options market to a bullish bias for the first time
in six months.
Signs that Israel is losing patience with efforts to curtail Iran´s
nuclear program, as well as the intensifying conflict in Syria, are
giving funds new reason to bet on crude despite a lack of evidence
that fundamentals are improving. Activity is muted so far by the
summer lull, but could pick up in September.
The renewed premium has been most apparent in futures markets, with
benchmark ICE Brent crude gaining 10 percent over the past two weeks.
At the same time, hedge funds boosted their bullish bets in U.S. oil
markets a week ago to the highest since early May, regulatory data
"The rally you´re seeing now is not because demand is up, but because
fear is up," said Charles Gradante, co-founder of New York´s
Hennessee Group, which invests with hedge funds.
"Some hedge fund managers feel the fundamentals of oil are still
negative and the price should go back down, so they´re shorting or
trying to short. But the majority are net long, waiting for the next
shoe to drop in the Middle East."
A flurry of comments by Israeli officials and Israeli media reports
over the past week put financial markets on edge by appearing to
suggest a strike on Iran could be launched before the U.S.
presidential election in November.
While U.S. Defense Secretary Leon Panetta and Israeli President
Shimon Peres have sought to downplay the risk of an imminent
unilateral attack, some funds are on guard.
In the U.S. crude oil options market, calls are being bid higher than
puts for the first time since February, indicating that demand to buy
contracts that would gain from rising prices (calls) is exceeding
that to take bearish bets (puts).
NOT AS PANICKED
So far the bets appear to be more modest than they were last
November, when funds loaded up on cheap options after a United
Nations report heightened concerns over Iran´s nuclear program, or in
February and March, when talk of a possible attack by Israel on Iran
drove Brent above $125 a barrel.
Those bets failed to pay off: instead of an attack, tougher U.S. and
European Union sanctions slowly cut off half of Iran´s oil exports,
and options volatility slumped.
"We´ve definitely seen an uptick in upside call buying," said one
senior trader at a large investment bank. "It´s not as panicked or
vociferous as it was last time because the bluff has been called
once -- and because it´s August."
But some are trying it again. Open interest in December 2012 $100
call options has risen by nearly 5,000 lots -- or 5 million barrels --
in the past two weeks.
"Given the implementation of the Iran embargo, we have crimped supply
enough to add some real upside risk potential that could easily
manifest itself in a price spike, especially if a conflict in the
Middle East is realized," said Chris Thorpe, executive director of
energy derivatives at INTL FC Stone.
"There is some fear baked in, for sure."
To be sure, these are still long-odds events, and broader market
gauges aren´t flashing red yet. Absolute option volatility levels are
low with calls and puts at around 30 percent, just up from near-
record lows under 25 percent in early May, according to Reuters
And some say that barring a wider regional war, the main event over
the next month or so will be the possibility of further quantitative
easing from the U.S. Federal Reserve.
"A strike on Iran might add $5, $10, $15 but once people realize that
we´re not getting a massive Middle East war, it will go back to where
it came from," said Lars Steffensen, managing partner at Ebullio
Capital Management, which runs a commodity hedge fund.
"Quantitative easing from the Fed will add $15-$20 to crude, and
that´s a premium that will stay there."
IRAN AND SYRIA
Gradante, who talks regularly with hedge fund managers about their
strategies, said many worry that Iran will get involved in the Syrian
conflict in some way to hit back at the United States for the Western
embargo on Tehran´s oil.
As the Syrian civil war takes on overtly sectarian overtones, it also
risks drawing in more regional powers, with Sunni-led Saudi Arabia,
Qatar and Turkey supporting the rebels and Shi´ite Iran backing the
One way for Iran to retaliate against its Western rivals would be to
block Egypt´s Suez Canal, an integral waterway for Middle East oil
tankers. It had previously threatened to block the Strait of Hormuz,
the world´s busiest route for oil, but experts say it may not do this
as the bulk of Iranian oil also travels through the strait.
"Disrupting supplies through the canal for a few days itself could
make oil go to $120, depending how long the debate takes," Gradante
said. "If the U.N. gets involved, it´ll easily take more than a week.
These are the kind of specific scenarios hedge fund managers are
speculating over." (Additional reporting by Claire Milhench in
London; Editing by Dale Hudson) (© Thomson Reuters 2012. 08/16/12)
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