Hottest Oil Options Show 18% Drop as Demand Falls (Update3)
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By Alexander Kwiatkowski
May 26 (Bloomberg) -- After oil passed $60 a barrel for the first time in six months, the New York Mercantile Exchange’s fastest-growing options trade in July is for a 18 percent drop.
The number of options to sell oil at $50 a barrel for July settlement rose 22 percent last week to 24,948. Traders expect prices to fall because U.S. crude inventories are 1.8 percent below the highest level in two decades, the International Energy Agency says demand is falling the most since 1981, and there’s enough unsold crude stored in offshore tankers to supply the U.S. for a week. Oil traded as high as $62.16 today in New York.
“Oil prices are rising way ahead of reality, way ahead of fundamentals,” said Eugen Weinberg, a senior commodity analyst at Commerzbank AG in Frankfurt. “It would be more reasonable for prices to drop a little and correct to $50 or below.”
Crude jumped as high as $62.26 a barrel on May 20 on optimism that the worst of the global recession and the Organization of Petroleum Exporting Countries agreed to cut supplies by the most on record. Now, economic reports are increasing speculation that the world economy will continue to sputter, and OPEC, which meets May 28 in Vienna, has yet to complete the supply curbs it promised in December.
Put Options
The number of contracts to sell July oil at $50 a barrel, or so-called put options, tripled to 24,948 on May 21 from May 7, according to Nymex data. The second most-popular contract for July settlement is the right to sell at $40, with 23,254 outstanding. There are almost twice as many positions that profit if oil falls as low as $40 a barrel as there are bets on a rise to $70.
July $50 put options lost 8 cents to settle at 15 cents today on Nymex, as July crude futures gained 78 cents, or 1.3 percent, to $62.45 a barrel.
Lower prices threaten government budgets from Venezuela to Saudi Arabia, while hindering Iranian President Mahmoud Ahmadinejad’s campaign promise to redistribute oil wealth. Also at risk are profits at Exxon Mobil Corp., Royal Dutch Shell Plc and BP Plc, which reported an average 61 percent drop in first quarter earnings.
British Airways Plc and Air France-KLM would benefit if prices fell after they posted full-year losses as the recession curbed travel. Consumers and businesses would see lower driving costs and household energy bills. European jet fuel prices were 42 percent higher last year than in 2007, while regular gasoline cost American motorists 17 percent more at the pump, according to data compiled by Bloomberg and the U.S. Energy Department.
China Demand
Oil rose more than 50 percent to a record $147.27 in July as investors flocked to crude as a hedge against inflation and a weakening dollar. Accelerating world demand led by China and India raised expectations that supplies were being squeezed, and threats against supplies mounted in Nigeria and the Middle East.
The rally ended, and oil tumbled 78 percent to as low as $32.40 on Dec. 19 as credit markets froze and the global economy fell into its first recession since World War II. The collapse of Lehman Brothers Holdings Inc. in September triggered a drop in gasoline demand and auto sales.
The world economy faces near-stagnation for 10 years because of rising unemployment in the U.S. and Europe, Nobel Prize-winning economist Paul Krugman predicted on May 14.
Japan’s economy, the world’s third-largest oil consumer, shrank at a record 15 percent pace last quarter as exports declined 26 percent. The European economy contracted at the fastest pace in 13 years, and the World Bank said optimism for an economic recovery in China may be “premature.” The U.S. and China are the biggest oil users.
‘Large Correction’
“Given the high level of crude inventories and contraction in activity in advanced economies, we still expect a large correction from these levels,” said Harry Tchilinguirian, the senior oil market analyst at BNP Paribas in London. “A low $40s level is still possible” before the end of September, he said.
Oil traded as low as $59.53 today in New York on speculation that OPEC won’t announce more production cuts this week even as the global recession curbs fuel demand.
Among oil analysts, 25 out of 27 surveyed by Bloomberg predict OPEC will maintain a target of 24.845 million barrels a day at the Vienna conference this week.
The 11 OPEC members outside of Iraq produced 25.81 million barrels a day in April, an increase of about 225,000 from March and the first increase in nine months, according to OPEC’s latest monthly report. Those 11 collectively made 77 percent of the 4.2 million barrels a day of planned output cuts, down from a revised 82 percent for March.
“I’m happy with compliance,” Saudi Arabian oil minister Ali al-Naimi told reporters in Rome on May 24. To reach a goal of $75 oil when demand recovers, Saudi Arabia will recommend OPEC that members “stay the course” at their meeting.
Backtracking
Rising prices encouraged OPEC to backtrack on last year’s pledges to plug budget deficits. Saudi Arabia, the biggest Arab economy and OPEC’s biggest oil exporter, projects a 65 billion- riyal ($17 billion) deficit this year as the kingdom builds infrastructure and creates jobs.
With oil near $60, OPEC will find it “hard to justify” more reductions, said Michael Wittner, head of oil market research at Societe Generale SA in London.
The global economic outlook determines oil prices more than OPEC, according to Michael Aronstein, the Oscar Gruss & Son Inc. strategist who predicted last year’s commodities collapse. “The global economy is going to surprise people on the top side,” he said today in an interview.
Geopolitical and hurricane risk may also give oil a lift.
Attacks against oil rigs and pipelines in Nigeria, the seventh largest crude supplier to the U.S., place a “risk premium” on oil prices, said Olivier Jakob, the managing director of Zug, Switzerland-based Petromatrix Gmbh. Seasonal maintenance in the North Sea, which accounts for about 5 percent of world production, may further reduce supply, Jakob said.
Hurricane Risk
In the U.S., the 2009 tropical weather season will be about normal, with four to seven hurricanes forming in the Atlantic Ocean, the National Oceanic and Atmospheric Administration predicted May 21. The most-active season was 2005 when Hurricanes Katrina and Rita devastated the Gulf.
While analyst forecasts compiled by Bloomberg show most projections are for oil at about $60 in the fourth quarter, now there’s a glut. U.S. crude stockpiles were 368.5 million barrels in the week ended May 15, according to the U.S. Energy Department. They reached a 19-year high two weeks earlier.
Industry-held inventories in the Organization for Economic Cooperation and Development were 2.75 billion barrels in March, 6.7 percent more than a year earlier, according to the Paris- based IEA. As much as 130 million barrels are stored offshore on 65 supertankers each the size of New York’s Chrysler Building awaiting buyers, according to the U.S. Energy Information Administration.
Hangover
The oil is “hanging over the market,” said David Fyfe, head of the IEA’s oil industry and markets division. Rising prices may encourage traders who are hoarding that crude to dump it onto the market, he said.
Trading departments in BP, Shell and Hess Corp. are among those making money from storing crude, they said.
Shell, based in The Hague, reported a 62 percent decline in first-quarter profit to $3.49 billion, while London-based BP Plc had a 64 percent drop in net income to $2.56 billion. Shell’s second-quarter profit is likely to decline 64 percent, while BP’s tumbles 63 percent as demand slows, according to data compiled by Bloomberg.
“Oil fundamentals are getting worse, not better, on a daily basis,” said David Hufton, managing director of PVM Oil Associates Ltd., the world’s largest broker of over-the-counter crude trading between banks, hedge funds and oil companies. “Oil strength in the near term depends totally and utterly on economic sentiment.”
To contact the reporter on this story: Alexander Kwiatkowski in London at [email protected]
Last Updated: May 26, 2009 16:30 EDT
Share | Email | Print | A A A
By Alexander Kwiatkowski
May 26 (Bloomberg) -- After oil passed $60 a barrel for the first time in six months, the New York Mercantile Exchange’s fastest-growing options trade in July is for a 18 percent drop.
The number of options to sell oil at $50 a barrel for July settlement rose 22 percent last week to 24,948. Traders expect prices to fall because U.S. crude inventories are 1.8 percent below the highest level in two decades, the International Energy Agency says demand is falling the most since 1981, and there’s enough unsold crude stored in offshore tankers to supply the U.S. for a week. Oil traded as high as $62.16 today in New York.
“Oil prices are rising way ahead of reality, way ahead of fundamentals,” said Eugen Weinberg, a senior commodity analyst at Commerzbank AG in Frankfurt. “It would be more reasonable for prices to drop a little and correct to $50 or below.”
Crude jumped as high as $62.26 a barrel on May 20 on optimism that the worst of the global recession and the Organization of Petroleum Exporting Countries agreed to cut supplies by the most on record. Now, economic reports are increasing speculation that the world economy will continue to sputter, and OPEC, which meets May 28 in Vienna, has yet to complete the supply curbs it promised in December.
Put Options
The number of contracts to sell July oil at $50 a barrel, or so-called put options, tripled to 24,948 on May 21 from May 7, according to Nymex data. The second most-popular contract for July settlement is the right to sell at $40, with 23,254 outstanding. There are almost twice as many positions that profit if oil falls as low as $40 a barrel as there are bets on a rise to $70.
July $50 put options lost 8 cents to settle at 15 cents today on Nymex, as July crude futures gained 78 cents, or 1.3 percent, to $62.45 a barrel.
Lower prices threaten government budgets from Venezuela to Saudi Arabia, while hindering Iranian President Mahmoud Ahmadinejad’s campaign promise to redistribute oil wealth. Also at risk are profits at Exxon Mobil Corp., Royal Dutch Shell Plc and BP Plc, which reported an average 61 percent drop in first quarter earnings.
British Airways Plc and Air France-KLM would benefit if prices fell after they posted full-year losses as the recession curbed travel. Consumers and businesses would see lower driving costs and household energy bills. European jet fuel prices were 42 percent higher last year than in 2007, while regular gasoline cost American motorists 17 percent more at the pump, according to data compiled by Bloomberg and the U.S. Energy Department.
China Demand
Oil rose more than 50 percent to a record $147.27 in July as investors flocked to crude as a hedge against inflation and a weakening dollar. Accelerating world demand led by China and India raised expectations that supplies were being squeezed, and threats against supplies mounted in Nigeria and the Middle East.
The rally ended, and oil tumbled 78 percent to as low as $32.40 on Dec. 19 as credit markets froze and the global economy fell into its first recession since World War II. The collapse of Lehman Brothers Holdings Inc. in September triggered a drop in gasoline demand and auto sales.
The world economy faces near-stagnation for 10 years because of rising unemployment in the U.S. and Europe, Nobel Prize-winning economist Paul Krugman predicted on May 14.
Japan’s economy, the world’s third-largest oil consumer, shrank at a record 15 percent pace last quarter as exports declined 26 percent. The European economy contracted at the fastest pace in 13 years, and the World Bank said optimism for an economic recovery in China may be “premature.” The U.S. and China are the biggest oil users.
‘Large Correction’
“Given the high level of crude inventories and contraction in activity in advanced economies, we still expect a large correction from these levels,” said Harry Tchilinguirian, the senior oil market analyst at BNP Paribas in London. “A low $40s level is still possible” before the end of September, he said.
Oil traded as low as $59.53 today in New York on speculation that OPEC won’t announce more production cuts this week even as the global recession curbs fuel demand.
Among oil analysts, 25 out of 27 surveyed by Bloomberg predict OPEC will maintain a target of 24.845 million barrels a day at the Vienna conference this week.
The 11 OPEC members outside of Iraq produced 25.81 million barrels a day in April, an increase of about 225,000 from March and the first increase in nine months, according to OPEC’s latest monthly report. Those 11 collectively made 77 percent of the 4.2 million barrels a day of planned output cuts, down from a revised 82 percent for March.
“I’m happy with compliance,” Saudi Arabian oil minister Ali al-Naimi told reporters in Rome on May 24. To reach a goal of $75 oil when demand recovers, Saudi Arabia will recommend OPEC that members “stay the course” at their meeting.
Backtracking
Rising prices encouraged OPEC to backtrack on last year’s pledges to plug budget deficits. Saudi Arabia, the biggest Arab economy and OPEC’s biggest oil exporter, projects a 65 billion- riyal ($17 billion) deficit this year as the kingdom builds infrastructure and creates jobs.
With oil near $60, OPEC will find it “hard to justify” more reductions, said Michael Wittner, head of oil market research at Societe Generale SA in London.
The global economic outlook determines oil prices more than OPEC, according to Michael Aronstein, the Oscar Gruss & Son Inc. strategist who predicted last year’s commodities collapse. “The global economy is going to surprise people on the top side,” he said today in an interview.
Geopolitical and hurricane risk may also give oil a lift.
Attacks against oil rigs and pipelines in Nigeria, the seventh largest crude supplier to the U.S., place a “risk premium” on oil prices, said Olivier Jakob, the managing director of Zug, Switzerland-based Petromatrix Gmbh. Seasonal maintenance in the North Sea, which accounts for about 5 percent of world production, may further reduce supply, Jakob said.
Hurricane Risk
In the U.S., the 2009 tropical weather season will be about normal, with four to seven hurricanes forming in the Atlantic Ocean, the National Oceanic and Atmospheric Administration predicted May 21. The most-active season was 2005 when Hurricanes Katrina and Rita devastated the Gulf.
While analyst forecasts compiled by Bloomberg show most projections are for oil at about $60 in the fourth quarter, now there’s a glut. U.S. crude stockpiles were 368.5 million barrels in the week ended May 15, according to the U.S. Energy Department. They reached a 19-year high two weeks earlier.
Industry-held inventories in the Organization for Economic Cooperation and Development were 2.75 billion barrels in March, 6.7 percent more than a year earlier, according to the Paris- based IEA. As much as 130 million barrels are stored offshore on 65 supertankers each the size of New York’s Chrysler Building awaiting buyers, according to the U.S. Energy Information Administration.
Hangover
The oil is “hanging over the market,” said David Fyfe, head of the IEA’s oil industry and markets division. Rising prices may encourage traders who are hoarding that crude to dump it onto the market, he said.
Trading departments in BP, Shell and Hess Corp. are among those making money from storing crude, they said.
Shell, based in The Hague, reported a 62 percent decline in first-quarter profit to $3.49 billion, while London-based BP Plc had a 64 percent drop in net income to $2.56 billion. Shell’s second-quarter profit is likely to decline 64 percent, while BP’s tumbles 63 percent as demand slows, according to data compiled by Bloomberg.
“Oil fundamentals are getting worse, not better, on a daily basis,” said David Hufton, managing director of PVM Oil Associates Ltd., the world’s largest broker of over-the-counter crude trading between banks, hedge funds and oil companies. “Oil strength in the near term depends totally and utterly on economic sentiment.”
To contact the reporter on this story: Alexander Kwiatkowski in London at [email protected]
Last Updated: May 26, 2009 16:30 EDT
