As inflation soars and supply dwindles from global inventory, traders are eager to bet oil price rising to higher levels. According to Markets Insider, one trader is betting on Brent crude to reach at an abnormal high level of $250 per barrel.
There are currently 5 million barrels of Brent $250/$300 call spreads traded from last Thursday. Additionally, there are contracts consisting of 8 million barrels of $200/$215 West Texas Intermediate call spreads for December 2022. For the first time since 2008, traders are betting on oil prices to be above $200 dollars.
There are of course reasons for these bullish bets, the first being that inflation has soared worldwide. In United States, core inflation increased 4.6%, the fastest growth since August 1991.
According to CNBC news, energy prices were up 30% since the start of this year. Food prices has also seen a sizable surge this year. Meat, poultry, fish and eggs were up 1.7% for the month of October, and 11.9% year by year. These numbers reflect a series of problems from supply chain crises to devaluation of currencies due to the Central Banks’ Quantitative Easing and increasing of government spending. When spendings outstrip revenues, it leads to a growth of debt which weakens government currencies. As a result, commodity prices begin to surge which will negatively impact the recovery of economy.
Second, the world oil market remained to be undersupplied, while deficit expanded in the third quarter from the second quarter. In OPEC’s recent monthly report in November, world oil demand bounced back from 92.87 million barrels in first quarter of 2021 to 97.89 million barrels in third quarter, while supply growth remained weak, unable to match the demand growth. Global inventory on the other hand, expanded from 1.46 million barrels deficit in the second quarter to 2.22 million barrels deficit in the third quarter, largely attributed to hurricane Ida and OPEC’s under-performance to meet production quota. This deficit in inventory was seen during the crude prices rally in early October, when both Brent crude and Western Texas Intermediate crude bench mark prices rose above $80 for the first time since 2018.
So far, prices have been falling due to concerns of supply growth from OPEC+ as well as Iran’s capacity to boost output if a nuclear deal is reached this year. At the same time, there is uncertainty on whether the White House would try to tap the Strategic Petroleum Reserve to solve the inflation crisis. Oil prices have been declining for the past few weeks, Western Texas Intermediate (WTI) crude has fallen below $80 on Monday, the second time this month since early November. Investors are still paying attention to Wednesday’s EIA report to see if inventory would signal a directional change.
But for price to go above $200 which is higher than the historical high of $147 in July of 2008, there are a lot of external factors that need to happen. One of the supporting factors behind the surge of crude in 2008 is the sharp decline of the U.S dollar from 2002 to 2008 fueling the super-cycle of commodity market. Oil is a big beneficiary from the decline of the dollar because of the Petrodollar policy, of which the value of dollar is backed up by oil, and when oil-exporting countries sell their oil, it has to be exchanged in U.S. dollars. Therefore, the credit of the dollar would affect global oil prices. Without this external factor, higher oil prices are unlikely to persist. Although $147 in 2008 will be approximately $175 to $180 in today’s money, inflation adjusted; the price is a lot closer than we normally think.