An unusual phenomenon has emerged in the crude oil market: despite high oil prices, funds are frantically buying put options.

The oil options market is experiencing a rare structural divergence: Brent crude spot prices remain high and geopolitical risks have not yet dissipated, but funds in the options market are clearly shifting towards put options rather than betting on further increases in oil prices.

This divergence between futures and spot prices indicates a shift in market focus. Spot prices still reflect a significant geopolitical risk premium, but the options market is increasingly pricing in a potential price pullback once that premium fades. Downside risks following an unexpected easing of the crisis are receiving more attention than the next supply shock.

Meanwhile, the macroeconomic attributes of crude oil are strengthening. As sharp fluctuations in the interest rate market increase portfolio pressure, some funds are beginning to hedge tail risks in other assets through crude oil positions. This demand has driven up crude oil prices, but has not simultaneously led to increased volatility, creating a clear divergence between price and volatility.

Cross-asset correlations are also strengthening. According to data from Morgan Stanley's quantitative and derivatives strategies, the correlation between WTI crude oil and the 10-year US Treasury yield has risen to its highest level in 35 years, while the negative correlation between US stocks and the 10-year yield has reached its strongest level since 1960. This gives the abnormal pricing in the oil options market a broader macroeconomic meaning.

The bearish bias is strengthening, and the options market is starting to bet on a receding risk premium.

In normal crisis markets, both call and put options are typically sought after: the former is used to hedge against supply shocks, and the latter to hedge against price declines after the crisis subsides. However, the current demand in the Brent options market is clearly skewed towards the downside.

The bearish skew continues to strengthen, while the bullish skew has fallen below pre-war levels. Although Brent crude remains near high levels, market demand for upward volatility is relatively limited, with funds flowing more towards the bearish side. In other words, the options market is paying a higher premium for a drop in oil prices after the crisis eases, but is not pricing in equivalent upward volatility for further supply shocks.

Improved fundamentals are also weakening support for upward volatility. According to Goldman Sachs data, supply bottlenecks that previously caused market tightness are easing: shipping traffic in the Strait of Hormuz is improving, east-west pipelines have returned to pre-conflict capacity, and exports from Yanbu port have resumed. Meanwhile, the market is entering a window of seasonally weaker demand.

Against this backdrop, at-the-money implied volatility has not risen in tandem with spot prices. The relative calm in oil market volatility contrasts sharply with the sharp rise in the MOVE index, while the VIX also remains low, indicating a clear divergence in volatility pricing across interest rates, stocks, and crude oil markets.

The trading structure has reversed, and crude oil is increasingly exhibiting macro hedging attributes.

Large-scale put option buying has created a net short put option exposure for traders, resulting in a negative "spot-volatility correlation" in Brent crude: rising oil prices may suppress volatility, while falling oil prices may increase hedging demand.

At the same time, the correlation between crude oil and macro assets has significantly strengthened. According to data from Morgan Stanley's quantitative and derivatives strategies, the correlation between WTI crude oil and the 10-year US Treasury yield is at its highest level in 35 years, while the negative correlation between US stocks and the 10-year yield is the strongest since 1960.

This means that crude oil bulls are increasingly taking on a macro hedging function. What's truly noteworthy in the current oil options market is no longer how much further oil prices can rise, but rather the deepening market pricing in downside risk for oil prices after the risk premium has subsided.

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