April 30, 2004

NEW YORK (Reuters) - Speculators banking on crude oil prices going much higher than already lofty levels now, perhaps hitting $50 a barrel by summer, are raising the ante, bets in the crude oil options market showed on Friday.

Those speculators, playing on the potential of oil supply being disrupted with violence in the Middle East on the rise, have bought crude oil options with strike prices of $40 and $50 on the June to October contracts, data from the NYMEX Web site show.

Call options are popular among oil traders because it doesn't take much money to buy them and the rewards could be very handsome.

"At the current call premium, what does it cost these speculators to get the deal on the board, $140 per contract? You could take up a collection in the office," said Tim Evans, senior energy analyst at IFR Energy Services in New York.

"This is playing the crude oil lottery by buying, say a $140 ticket on the off-chance that prices push through those levels. But you'd need a truly significant supply disruption on the order of, say Iraq supplies evaporating," Evans noted.

"Or another nationwide strike in Venezuela as an alternate cause. They're still looking for an August referendum on (President Hugo) Chavez so if you're looking at September crude options it might serve to hedge both of those possibilities," he added.

While some speculators think prices will hit the roof due to geopolitical events, many are also placing bets that prices will drop below current levels, which are near the 13-year high settlement of $38.18 hit on March 17, the same data show.

The reason for betting prices will go down, say analysts, is that crude oil supplies are on the rise, making it safer for oil traders to buy call options with strike prices at or below $38.

Crude oil prices hit an all-time high of $41.15 on Oct. 10, 1990, two months after Iraq invaded Kuwait and amid the buildup to the first Gulf War.

The open interest on options on the June contract with a strike price of $40 is a hefty 10,196, that for $50 number only 467. The options expire on May 17.

The open interest for July and August for $40 call options were at 2,662 and 3,399, respectively, while those for $50, at 51 and 949, respectively. Those options expire on June 17 and July 15.

Interestingly, the options opened for September for those prices have shot up, with the $40 strike price showing an open interest of 7,947 and for $50 at 7,941. The September options expire on Aug. 17.

For October, $40 call options decline to 2,919 and $50 to just 388, with options expiring on September 16.

Bets that prices will stay at or below current levels are also sizable.

June call options at $38 and $38.50 are 4,477 and 1,489, respectively. In the same month, open interest for $33 options are at a relatively high 8,098.

Open interest for options at those prices for July, August, September and October range from a few hundreds to a few thousands.

http://www.reuters.com/newsArticle.jhtml?type=topNews&storyID=5004379