As traders weigh the probability of a civil war in Iraq and disrupted oil production from OPEC’s second-largest producer, betting that oil prices will spike now costs more than it has in three years.
Bullish options giving traders the right to buy the U.S. Oil Fund LP (NYSEARCA:USO) are the most expensive since March 2011 relative to contracts protecting against a slump in the exchange-traded fund (ETF), according to Bloomberg. The options volume passed 94,000 calls giving the right to buy the fund on June 12, the most since August. The ETF following West Texas Intermediate crude has gained nearly 4 percent since June 6, hitting a nine-month high this week.
Oil prices have risen since the terrorist group Islamic State of Iraq and Syria (ISIS) began capturing towns and cities in northern Iraq last week and making its way south along a main highway to the capital Baghdad. On Wednesday, ISIS took over the country’s largest oil refinery. The Iraqi military continued battling the Sunni militants Thursday to regain control of the facility, which can process about 300,000 barrels of oil per day.
Still, three-quarters of Iraq’s oil production is in the southern part of the country, away from ISIS and under the Iraqi government’s domain. The fighting in the north “should not have much of an effect on current oil production or exports,” Capital Economics commodities economist Tom Pugh said.
“Pricing crude oil is not only about production,” Tom Gellrich, oil and gas analyst for Topline Analytics, said. “It’s about perception, it’s about what people think will happen.”