Bullish Flow in Oil ETF Options Belies Dim Outlook

A bullish signal emerging from trading in the options in the largest exchange-traded oil fund should be taken with a pinch of salt because the outlook for crude prices remains bleak, analysts said.

U.S. crude has largely stayed below the $50 mark for more than three months, but call options on the United States Oil Fund (USO), typically used for placing bullish bets on shares of the fund, have seen a big uptick since October.

Calls outnumber puts by a 1.3-to-1 margin, the highest in three years, according to options analytics firm Trade Alert. That growing preference for the calls is a departure from the norm.

The USO consistently sells cheaper front-month futures and buys more expensive longer-term futures, so it tends to fall over the longer-term. It is for this reason that put options are usually in higher demand.

The surge in call activity might be due to protective positioning, said Peter Cecchini, chief market strategist at Cantor Fitzgerald.

"As people have brought up their short exposure in the energy space, they might be hedging it using calls on the USO," he said. Energy stocks have been rallying lately, gaining more than 12 percent in the last month, as investors have turned to those stocks, which are still the S&P 500's worst-erforming sector this year.

Open interest in USO calls has grown to 1.8 million contracts, up 20 percent since the beginning of October. Open interest in puts that would protect against a decline in the shares has declined by about 15 percent in the same period.

Calls on USO shares rising above $20 by mid-January represent the largest block of open interest in the fund's options. The last time the shares were at $20, U.S. crude was touching $60 a barrel. On Wednesday, U.S. oil futures were trading at $47.62 a barrel.

"There is an awful lot of things that have to go right for the people who are in ETFs and are sort of betting on much higher numbers of crude oil," Tom Kloza, global head of energy analysis for the Oil Price Information Service, said. "And I just don't know if that many things can go right."

Continuing oversupply of crude and weaker global economic growth could keep oil prices from rallying in a meaningful way, analysts said. On Wednesday, the oil fund's shares were down 7 cents at $15.21.

(Reporting by Saqib Iqbal Ahmed)