New York: Oil analysts from Citigroup Inc to Bank of America Merrill Lynch are confident that the new bear market in crude will be short-lived, while legendary oil trader Andy Hall sees a “violent reversal” ahead. The options market increasingly agrees with them.

Investors this week were paying the smallest premium in almost two months to protect against a drop in prices through the end of the year, even after oil entered a bear market.

The so-called put skew on December Brent and West Texas Intermediate options — the premium traders will pay for insurance that prices will fall rather than rise — has narrowed more than 30 per cent since early July. The skew on second-month WTI contracts has fallen by almost half. That pullback in bearish sentiment fits in with the view that the worst of the oil rout is over and prices will recover as a global surplus continues to ease.

“This is telling us that they see little chance of us hitting $25 in the near term,” said John Kilduff, partner at Again Capital LLC, a New York hedge fund focused on energy. “There’s only a little over a month for the price to fall more than $10. Also, options are protection against volatility and there hasn’t been a lot of volatility since the market has been moving in one direction: down.”

Brent joined WTI in a bear market on Tuesday, with both crudes down at least 20 per cent from their June highs on signs that the global supply glut will take longer to trim. Canadian production has returned after wildfires, Libyan ports are reopening and US producers have returned more drilling rigs to work. Money managers have responded by adding bets on falling prices at the fastest pace in at least a decade.

“The market is being driven by its own momentum and currently that is down,” Hall wrote to investors in his Stamford, Connecticut, hedge fund, Astenbeck Capital Management LLC. “But extreme positioning coupled with improving fundamentals should ultimately and at potentially any time result in a strong reversal.”

Iran, which is seeking to regain market share after sanctions were lifted early this year, pumped 3.55 million barrels a day in July, the most since 2011, according to a Bloomberg survey. Saudi Arabia, the biggest oil exporter, lowered pricing for crude to Asia in September, signalling the kingdom has no plans to back down while rival Iran angles for a bigger share.

Slower growth

At the same time, demand growth is slowing, with US gasoline consumption estimates reduced for a second month by the Energy Information Administration. American GDP was also revised lower, signalling the world’s largest economy may not grow as fast as previously thought.

“The fact that the cost of downside protection — buying out of the money puts, relative to upside production (buying out of the money calls) — has lessened may suggest that the market does not see the spot price too much lower from here,” said Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas SA in London.

US refineries typically perform maintenance in September and October as fuel demand eases with the end of the summer driving season. Over the past five years, their demand for oil has dropped an average of 1.2 million barrels a day from July to October.

Prices might resume their upward trajectory in the fourth quarter as refinery maintenance winds down and heating-fuel demand picks up. Wall Street analysts tracked by Bloomberg predict WTI will average $49.85 a barrel in the fourth quarter while Brent will be $52.

“We view this dip as a buying opportunity,” said Francisco Blanch, head of commodity markets strategy at Bank of America Merrill Lynch, in a Bloomberg Television interview. “It’s all extremely seasonal.”