Oil Drops On Stock Build, But Middle East Hostilities Cause Open Options Contracts To Soar

Meanwhile, efforts continue to bring about a ceasefire: File Image/Pixabay

A larger than expected rise in U.S. crude inventories caused a drop in oil prices on Wednesday, while analysts continued to monitor hostilities in the Middle East with hopes that a ceasefire might still be feasible.

Brent settled down $1.08 at $74.96 per barrel, while West Texas Intermediate settled down 97 cents to $70.77.

WTI's prompt spread — the difference between its two nearest contracts — fell to the lowest intraday level since early this month on Wednesday, a sign of a potential supply glut.

Stoking bearish sentiment, the Energy Information Administration reported that crude inventories rose by 5.5 million barrels to 426 million barrels in the week ended Oct. 18, compared to expectations for a 270,000 barrel increase.

While some were puzzled by the increase compared to last week's sizeable drop, Andrew Lipow, president of Lipow Oil Associates, pointed out that "The large crude oil inventory build this week is offsetting the drop last week, but a lot of this is a result of the rebound in crude oil imports, a lot of it had to do with the hurricane."

Meanwhile, U.S. secretary of state Antony Blinken held talks with Saudi Arabia crown prince Mohammed bin Salman in Riyadh with the aim of reaching a cease-fire in Gaza and Lebanon, even though Israel vowed to retaliate against Iran for an earlier missile attack and conducted heavy air strikes on the Lebanese port city Tyre.

Brian Kessens, a managing director at Tortoise Capital Advisors, said with regards to crude prices finding a floor on Wednesday due to persistent geopolitical risks, "If we had seen something really notable on the production side, that may have been a bigger driver, but this is a number that the market can look through and say 'Hey, what's going on with the macro again?'"

Finally, according to data compiled by Bloomberg, the number of open options contracts in Brent has soared by over 25 percent so far in October, and this week the total number of these exceeded for the first time 4 million contracts, equivalent of 4 billion barrels.

The phenomenon was attributed to market participants looking to hedge against price spikes as risk of all out war in the Middle East grow.