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Geopolitical Risks Drive Oil Hedging to Record Levels

by Krystal

In October, traders and investors set new records by trading an unprecedented number of oil options and futures contracts. The goal was to capitalize on market volatility and safeguard against price fluctuations, whether down or up.

Oil options give holders the right, but not the obligation, to buy or sell oil at a specific price within a designated time period, provided the market price moves beyond that set level.

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The surge in trading activity came amid rising concerns over geopolitical risks, particularly after Iran’s missile strike on Israel earlier in the month. Market participants closely monitored Israel’s response throughout October, rushing to buy futures and options to protect against potential uncertainties.

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Oil prices fluctuated throughout October, swayed by fears of an expanding regional conflict and worries about weaker global oil demand. When Israel refrained from targeting energy infrastructure in its retaliation against Iran, oil prices plummeted by 4% in a single day, underscoring the market’s vulnerability to shifting factors.

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Both the Intercontinental Exchange (ICE) and CME Group reported record high trading volumes this week, particularly in energy contracts.

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ICE revealed that its average daily volume (ADV) in energy soared by 21% from the previous year in October. Open interest also rose by 21%. Oil ADV climbed 22% year-on-year, with options contracts reaching a record 435,000 lots. On October 25, open interest hit a historic 15.8 million lots, according to the exchange.

Additionally, record numbers of contracts were traded in Brent Crude and gasoil futures and options.

CME Group also reported record-breaking activity in October, with a notable increase in energy, interest rate, metals, and agricultural product contracts. Energy ADV rose 16%, and energy options saw an all-time high, reaching 528,000 contracts. Trading in Henry Hub Natural Gas futures surged by 22% to 562,000 contracts, while WTI Crude Oil options ADV surged by 45% to 282,000 contracts.

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