Caifinance News on October 8th (Editor Xiaoxiang) Against the backdrop of escalating tensions in the Middle East, international oil prices have soared continuously in the past week. Although the global benchmark Brent crude oil has just broken through the $80 mark, many options traders have already started preparing for the oil price to "break a hundred".

According to FactSet data, with last week's oil price soaring by about 9% in a single week, traders in the oil options market have shown a record interest in betting on the call options for oil prices to rise to $100 per barrel next month.

Last Thursday, the open interest contracts for $100 call options expiring in November at the Chicago Board Options Exchange reached a record high of 18,628 contracts. The open interest contracts for the $100 call options expiring in December also reached 41,424 contracts, setting a new high since September 20th.

These call options give traders the right to buy oil futures contracts at that price, even though they are not obligated to do so.

Previously, Iran launched a large-scale missile attack on Israel last week, and the Israeli government vowed to retaliate. At the same time, on the anniversary of a new round of Israeli-Palestinian conflict, Hamas, Houthi militants in Yemen, and Hezbollah in Lebanon launched rocket and missile attacks on Israel on Monday. Israel continued its offensive in northern Gaza and Lebanon border.

Phil Flynn, Senior Client Manager and Market Analyst at Price Futures Group, said, "Last week we saw the biggest jump in oil prices in over two years. Prior to this, the oil market seemed 'immune' to geopolitical risks - people ignored these geopolitical factors, and hedge funds repeatedly pushed oil prices down. But now, this is a warning because geopolitical risks are becoming a reality."

Many traders are currently worried that energy infrastructure in the Middle East, especially in Iran, may be attacked, hindering oil supply, or causing disruption in the Strait of Hormuz. US President Biden stated last Thursday that Israel had discussed attacking Iranian oil facilities in retaliation for Iran's missile launch on Israel last week. He later suggested that Israel should consider other options.

Iran currently exports about 1.7 million barrels of crude oil per day, mainly from a terminal on Kharg Island, located approximately 25 kilometers off the country's southern coast.

Flynn pointed out that this could truly disrupt the supply of a major oil-producing country, which would be more difficult to replace. He explained, 'If we do see a significant cut-off in Iranian oil exports for some reason, it could lead to one of the most tense supply-demand situations globally in decades.'

He added, 'This could result in a sharp spike in oil prices, causing problems not only for the global economy but also for the Federal Reserve, as they would need to strike a balance between the impact of soaring oil prices on the economy (potential economic slowdown and new inflation pressures).'

Traders quickly adjusted their positions.

There are indications that many hedge funds had previously been betting broadly on oil prices continuing their decline this year, but now they have started adjusting their positions. According to Intercontinental Exchange (ICE) data, fund managers reduced significant short positions in Brent crude and increased long positions as of the week ending on October 1st (early in the week when oil prices started rising).

Flynn stated that the escalating geopolitical tensions are leading more energy market traders to hedge against the prospect of oil prices surging to $100 per barrel.

'I think $100 per barrel in the short term is the worst-case scenario. But this does not mean there isn't a lot of trading capital in these options to hedge against this worst-case scenario,' he pointed out. In fact, if you look at the number of options priced above $100 per barrel, for various reasons, the quantity is three times that of a normal situation. Flynn explained, 'Many people who are bearish on this market are trapped, and they are paying hedging costs for the worst-case scenario.'

Regarding these $100 call options, Flynn said, 'While these options may not seem profitable at the moment, if oil prices soar significantly, in that case, your investment could double or quadruple. If this scenario does not unfold, then your risk is essentially limited to the cost you paid for the options.'

A recent report by Goldman Sachs also indicates that if Brent crude oil and West Texas Intermediate crude oil prices rise significantly, algorithm-driven traders known as Commodity Trading Advisors (CTA) may release up to $40 billion in bids.

Goldman Sachs analysts point out that if Iranian oil supply is affected, the price of Brent crude oil could reach $90 per barrel or higher, with the specific price impact depending on whether other OPEC member countries increase output to compensate. If Iranian supply decreases by 1 million barrels of oil per day (for example, due to increased enforcement of sanctions), with OPEC taking action to fill the supply gap, the price of Brent crude oil could rise to around $85, while without measures, it could reach a peak of around $95.

On Monday, Brent crude oil futures prices rose by 3.7% to $80.93 per barrel, while US WTI crude oil futures prices also rose by 3.7% to $77.14 per barrel. Last week, both benchmark crude oils rose by 9.1%.

In a report, David Oxley, Chief Climate and Commodity Economist at Capital Economics, also stated that after Iran launched missile attacks on Israel last week, the risk of supply disruptions has increased.

He stated, "The biggest risk is an escalation of tensions leading to a halt in shipping through the Strait of Hormuz. Risk premiums will dominate in the short term; depending on developments, one can imagine oil prices rising by another $20 per barrel."