Oil Traders Bet on Further Drops

Bets that oil investors made in options markets help explain why crude prices fell so sharply on Monday and show that traders are bracing for prices to lurch lower again. U.S. crude prices swooned in tandem with stocks and other industrial commodities to start the week after the spread of the coronavirus Delta variant shook confidence in the global economic re- BY JOEWALLACE bound. West Texas Intermediate futures recovered some lost ground Tuesday but remained 10% below their recent closing high at $67.42 a barrel. Monday’s decline—oil’s biggest since September—interrupted a relentless climb that had pushed prices to multiyear highs, increasing gasoline bills for drivers and leading Washington to encourage Mideast producers to pump more crude. Some investors were betting that a combination of constrained supplies and booming demand would push oil above $100 a barrel for the first time since 2014. Behind the burst of volatility is a realization that vaccines won’t prevent episodic flare-ups in infection and the introduction of measures to control new variants, according to Marwan Younes, chief investment officer at Massar Capital Management, a commodities- focused hedge fund. “It’s going to be a lot more turbulent than people expected,” he said. Mr. Younes is positioning for crude prices to drop further, though not drastically. He sees crude settling in a range between $60 and $65 a barrel. Investors say the Delta variant’s transmissibility, even in countries such as the U.K. and Israel where vaccinations are widespread, raises the prospect of fresh restrictions on economic activity, particularly in fuel-intensive Asian countries with lower vaccination rates. Though few money managers expect a return to 2020- style shutdowns in the U.S. or Europe, they say caution among consumers or limitations on international travel could crimp the recovery in demand. Global oil consumption has roared back as major economies have unwound lockdown measures, but it isn’t expected to reach prepandemic levels until late 2022, according to the International Energy Agency. Meantime, the Organization of the Petroleum Exporting Countries and allies including Russia are preparing to unleash millions of barrels of bottled-up crude. A possible increase in Iranian crude exports if there is a nuclear deal with Washington is another factor prompting investors to dial back expectations for fresh gains in oil. One sign that traders think the monthslong stretch of steady gains for oil is over can be found in the options market. Options are contracts that allow investors, producers and traders to speculate on—and protect against—price moves in return for a fee. A gauge of how far traders anticipate WTI futures prices will swing over the next 30 Please turn topageB15