Oil USD 200 Options Rise 10-Fold in Bet on Higher Crude (Update1)
By Grant Smith
Jan. 7 (Bloomberg) – The fastest-growing bet in the oil market these
days is that the price of crude will double to USD 200 a barrel by the
end of the year.
Options to buy oil for USD 200 on the New York Mercantile Exchange
rose 10-fold in the past two months to 5,533 contracts, a record
increase for any similar period. The contracts, the cheapest way to
speculate in energy markets, appreciated 36 percent since early
December as crude futures reached a record USD 100.09 on Jan. 3.
While analysts at Merrill Lynch & Co. and UBS AG say the slowing U.S.
economy will lead to the biggest drop in prices since 2001, the
options show some traders expect oil to rise for a seventh straight
year. Demand will increase 2.5 percent in 2008, according to the
International Energy Agency. U.S. inventories fell to a three-year low
on Dec. 28. Production from Mexico is declining and Saudi Arabia is
behind schedule in opening its newest field.
One hundred dollars a barrel is actually 14.9 cents a cup, so we're still talking about oil being remarkably cheap,'' said Matthew R. Simmons, chairman of Simmons & Co. International, a Houston-based investment bank that focuses on energy. Inventoriesare tight as a
drum and I don’t see how we get out of this box,’’ he said in a
Bloomberg television interview last week. ``Demand clearly isn’t
starting to slow down.’’
World consumption will rise to 87.8 million barrels a day this year,
2.1 million more than in 2007, or about the same amount that Nigeria
supplies, according to the Paris-based IEA, an adviser to
oil-consuming nations. Demand from China alone will increase 5.7
percent to 8 million barrels a day as imports expand to support an
economy that’s likely to grow 11 percent, the IEA said.
Oil suppliers are straining to increase production. Saudi Arabia, the
world’s largest exporter, said last week that the 500,000 barrel-a-day
Khursaniyah oilfield missed a December start date. Brazil’s Tupi
field, the second-largest find of the past two decades, lies more than
eight kilometers (five miles) below the ocean surface and will take at
least five years to develop.
Petroleos Mexicanos, Mexico’s state oil monopoly, suffered a
three-year, 40 percent decline at its Cantarell field, the world’s
third-largest. Fighting in Nigeria reduced production 11 percent since
December 2005 to 2.18 million barrels a day, according to data
compiled by Bloomberg.
Crude futures rose 2 percent in the first three trading days of the
new year, closing at USD 97.91 a barrel in New York on Jan. 4. U.S.
crude inventories fell to a three-year low of 289.6 million barrels on
Dec. 28, according to a Jan. 3 Energy Department report.
Oil for February delivery today fell as much as 80 cents, or 0.8
percent, to USD 97.11 a barrel in after-hours electronic trading on
Nymex. It was at USD 97.42 at 3:08 p.m. Singapore time.
We haven't got to USD 100 on just a whim,'' said Paul Horsnell, head of commodities research at Barclays Capital in London.This is at
heart also about longer-term concerns that supply capacity investment
needs higher prices to keep up with demand growth.’’
Barclays forecasts oil will average USD 87.40 a barrel this year, a 21
percent increase from the 2007 average.
The Nymex options, which give speculators the right to buy 1,000
barrels of oil in December, are becoming a favorite for traders even
if they don’t expect crude to reach USD 200 because they are a cheaper
way to speculate than using futures contracts. Options expire
worthless if crude fails to reach the ``strike’’ price. There were 500
of the options on Nov. 7.
The price of the options rose as high as USD 550 last week before
closing at USD 300 on Jan. 4. That amounts to 30 cents a barrel. The
December futures to purchase 1,000 barrels in December rose 3.5
percent to USD 94,010, or USD 94 a barrel.
The most common analogy used to describe options is that it represents insurance'' againstlow probability’’ events, said Tim
Evans, an energy analyst at Citigroup Global Markets Inc. in New York.
Oil forecasters say there’s no chance of USD 200 crude, as the U.S.,
which consumes a quarter of the world’s oil, slows. Prices will
average USD 78 a barrel this year, 20 percent below the current level,
and USD 75 in the fourth quarter, according to the median forecast of
27 analysts surveyed by Bloomberg. The last time prices fell that much
was in 2001, when they dropped 26 percent.
Merrill Lynch and Morgan Stanley in New York expect the U.S. economy,
the world’s largest, will slip into recession this year. The jobless
rate rose to 5 percent in December, the highest in two years. The
Institute for Supply Management’s factory index fell to the lowest
level in almost five years in December.
The U.S. probably expanded 1 percent last quarter, according to the
median estimate of 63 economists surveyed by Bloomberg. Gross domestic
product will grow 2.3 percent in 2008, the survey showed.
Oil is overpriced, given the outlook for the economy, said Jan Stuart,
an analyst at UBS AG in New York. He forecasts an average price of USD
74 a barrel this year, little changed from 2007. Merrill Lynch’s
Francisco Blanch predicts USD 78 in the fourth quarter.
``I am afraid that we are going to see an economic slowdown that we
have not seen the beginning of yet that will take some significant
amount of oil demand off the table,’’ Stuart said in a Bloomberg
television interview Jan. 2.
Most strategists didn’t foresee last year’s 57 percent gain. Crude
traded at an average of USD 72.36 in 2007. A Bloomberg survey of 29
analysts in September 2006 forecast a median price of USD 64.
``Going through USD 100 means that people are seeking more protection
against a higher number,’’ said Michael Lewis, a strategist at
Deutsche Bank AG strategist in London. Deutsche Bank expects oil to
fall to about USD 80 a barrel.
Options trading indicates that the likelihood of crude reaching USD
125 a barrel in December has almost doubled since Dec. 25, to 18
percent, Lewis said.
While USD 200 may remain an outside chance, Simmons at Simmons & Co.
showed he’s willing to make that bet. He wagered USD 5,000 with New
York Times columnist John Tierney in August 2005 that oil would
average at least USD 200 a barrel in 2010.
The latest assessment from OPEC, which produces 40 percent of the
world’s oil, suggests prices will rise.
``There is enough oil in the market,’’ Chakib Khelil, the current
president of the Organization of Petroleum Exporting Countries, told
reporters in Algiers two days ago. Khelil, who is also Algeria’s
energy minister, said rising prices aren’t OPEC’s fault. The group is
scheduled to meet Feb. 1.
``You will see even USD 200 oil in the next five years,’’ said
Jean-Francois Tardif, senior portfolio manager at Sprott Asset
Management Inc. in Toronto.
The following table shows the median, mean, high and low estimates for
the average price of Nymex crude oil futures during the four quarters
of this year and the yearly averages for 2008 and 2009. The estimates
from 27 analysts were compiled by Bloomberg.