Oil Futures Surge Amid Middle East Tensions

By Georgina McCartney

HOUSTON (Reuters) – Investors ramped up oil futures and options trading in October to record levels to hedge against growing uncertainty due to ongoing Middle East conflicts and a bearish 2025 supply-demand outlook, resulting in significant fluctuations in crude prices.

Hedging helps producers mitigate risk by locking in prices for oil and allows traders to capitalize on volatile markets.

In October, approximately 68.44 million barrels were traded in futures and options, hitting a record high, surpassing March 2020's monthly record, when Brent futures dropped around $30 per barrel due to COVID-19 lockdowns impairing global oil demand.

CME Group reported a record daily volume for weekly crude oil options on October 18, trading 58,132 contracts. Aegis Hedging saw a 15% increase in trades compared to its previous monthly record, reflecting heightened activity due to market jitters and geopolitical threats, including the potential for attacks on oil infrastructure.

Investors were particularly attentive to Israel's response to an Iranian missile attack on October 1, leading to concerns over potential retaliation affecting oil infrastructure. However, Israel's subsequent strikes did not disrupt energy supplies, reducing oil's geopolitical risk premium and causing Brent crude to drop by around $4 the next trading day.

Throughout October, Brent crude fluctuated between $70 and $81 per barrel. Last quarter, Brent futures decreased by 17%, while West Texas Intermediate (WTI) dropped by 16% according to LSEG data.

With geopolitical risks causing volatility, many investors turned to options markets for efficient risk management, trading over 8.38 million barrels in Brent options, exceeding April 2024's record of 6.02 million barrels.

Sluggish Demand Outlook

Despite geopolitical tensions offering some potential upward price movements, traders are contending with a weak fundamental outlook for 2025, with WTI averaging around $65 per barrel next year, and potentially dipping below $50 if OPEC+ increases production.

Industry analysts indicate that the market is grappling with an oversupply and sluggish demand, prompting a 38% year-on-year increase in average daily WTI options traded. U.S. shale producer Coterra Energy expanded its derivative contracts, adding 305,000 barrels of WTI oil hedges for Q4 2024 in its earnings report. Additionally, it secured 4.205 million barrels of hedges for the remainder of 2025.

Concerns over OPEC+'s timing in reversing recent output curbs heightened market apprehension, propelling hedging activities. OPEC+ agreed to delay its planned oil output increase for December by one month due to sluggish demand, especially from China, and rising supplies from non-OPEC producers, which sustained downward pressure on the oil market.