Oil’s return to $100 has become the
biggest bet in the crude options market.

The price of options to buy December 2011 futures at $100 a
barrel jumped 14 percent on Nov. 24, the largest one-day gain in
three months, according to data compiled by Bloomberg. So-called
open interest for the contract has risen 51 percent this year to
45,424 lots, the highest for any crude option on the New York
Mercantile Exchange.

The increase in trading of $100 options shows some investors
anticipate oil will rise at least 19 percent to levels last
reached in 2008. While crude is up 8 percent this year as the
economy recovers, Morgan Stanley said Nov. 1 that prices will
reach $100 next year as spare production capacity shrinks. At
the same time, BNP Paribas SA said Nov. 18 further price gains
“will be difficult” as the Federal Reserve seeks to revive the
U.S. economy through an extended stimulus program and Europe
struggles to contain its sovereign debt crisis.

“The tug-of-war in oil prices continues as the short-term
debt market concerns obscure improving oil-market
fundamentals,” Lawrence Eagles, global head of commodities
research at JPMorgan Chase & Co. in New York, said in a Nov. 26
report.

Options contracts that give investors the right to buy
December 2011 futures at $100 a barrel rose to $5.55 on Nov. 24,
from $4.87 the day before, the largest increase since Aug. 27,
Bloomberg data show. They have averaged $6.38 this year and
ended last week at $5.46.

Not So Quick

When asked today about crude rising to $100, Deutsche Bank
AG Chief Energy Economist Adam Sieminski in Washington said
“oil could get that high but I don’t really think it’s going to
get there in the next six months.”

“Oil will just continue to get stronger as the
fundamentals improve, things really begin to look good in 2012,
2013, 2014,” Sieminski said in an interview with Deirdre Bolton
on Bloomberg Television’s “Inside Track.”

Oil futures snapped two weeks of declines on the Nymex last
week, rising 2.8 percent. The front-month January contract
surged 2.4 percent today to $85.73 a barrel in New York, the
highest settlement since Nov. 11. December 2011 futures traded
at $88.64.

“There are definitely risks to the downside but you still
have other risks out there to the upside,” said Jeff Currie,
London-based head of commodities research at Goldman Sachs Group
Inc., which correctly predicted last year that oil would reach
$85 by the end of 2009 and now sees it trading at $100 in 12
months. “U.S. economic data has surprised to the upside. This
shifts the focal point back toward the U.S.”

Irish Bailout

A gain to $100 would trail the record $147.27 a barrel
reached on July 11, 2008.

Oil futures have dropped 4.2 percent since Nov. 11 after
China said it will raise bank reserve requirements to stem
lending and Ireland headed toward talks on a European Union-led
bailout.

Crude had surged 6.6 percent in the five-days ending Nov.
5, the week the Fed announced it would purchase an extra $600
billion of bonds in a second round of so-called quantitative
easing.

‘Sugar Rush’

With the “sugar rush” from quantitative easing over,
“another leg up in prices will be difficult,” Harry Tchilinguirian, BNP Paribas’s head of commodity markets strategy
in London, said in a Nov. 18 note.

Hedge funds cut bets on rising oil the week before last,
reducing so-called net long positions by 15 percent, the most in
almost three months, according to the Commodity Futures Trading
Commission’s weekly Commitments of Traders report released Nov.
19. Bets on gains in oil prices climbed to the highest level in
at least four years in the week before the Fed’s announcement.

Americans increased spending for a fifth month in October,
with household purchases rising 0.4 percent, the Commerce
Department said Nov. 24. The number of people filing
unemployment claims fell to 407,000, the lowest level in more
than two years in the week ended Nov. 20, the Labor Department
reported the same day.

Even if the U.S. recovery falters, investors are banking on
China sustaining crude prices. The world’s fastest-growing oil
user will consume 9.6 million barrels a day in 2011, second only
to the 19.1 million barrels a day to be used in the U.S.,
according to the Paris-based International Energy Agency.
China’s oil demand will rise 4.2 percent next year while that of
the U.S. will decline 0.2 percent, the IEA said.

Record World Demand

“Global oil demand is set to hit a new record in 2011,”
said Francisco Blanch, New York-based head of commodities at
Bank of America Merrill Lynch. “The underlying economic picture
is still positive. We are still looking for economic growth
because of quantitative easing and accelerating growth in
emerging markets.”

Most members of the Organization of Petroleum Exporting
Countries, which supplies 40 percent of the world’s oil, have
said they’re comfortable with prices between $70 and $90 a
barrel. Libya views $100 as acceptable. OPEC Secretary-General
Abdalla El-Badri said prices at $100 wouldn’t necessarily damage
the global recovery or prompt it to increase production unless
accompanied by a supply disruption.

“If there is a physical shortage, I think OPEC will act,”
El-Badri said in a Nov. 24 interview in London. OPEC meets next
in the Ecuadorean capital Quito, on Dec. 11.

Senior analysts at the IEA, founded by consuming countries
in 1974 in response to the Arab oil embargo, also expect oil
prices to grind higher in time.

“In terms oil markets, I believe the age of cheap oil is
over,” IEA Chief Economist Fatih Birol said at a conference in
Budapest on Nov. 26. “There may be zigzags in the future
according to the economy, this and that, but the general trend
is we will see higher oil prices.”

To contact the reporters on this story:
Grant Smith in London at
gsmith52@bloomberg.net;
Mark Shenk in New York at
mshenk1@bloomberg.net

To contact the editor responsible for this story:
Stephen Voss on
sev@bloomberg.net