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Plunging oil prices: Speculators bet on $15 per barrel in 2016

By on January 10, 2016

As crude oil price plunges further, global speculators are reported to be buying put options contracts that will only pay out if price drops to as low as $15 a barrel in 2017, the latest sign some investors expect an even deeper slump in energy prices.
The prices on Wednesday fell below $35 per barrel for the first time since 2004, tumbling more than five percent as the row between Saudi Arabia and Iran made any cooperation between major exporters on cutting crude oil supply to the international market more unlikely.

The diplomatic face-off between Saudi Arabia and Iran after the Saudi execution of a Shi’ite cleric, Nimr al-Nimris believed to have ended speculation that the Organisation of Petroleum Exporting Countries (OPEC) could agree to cut production to lift the price of oil.
Riyadh had called off diplomatic ties with Tehran over Iran’s response to the execution of the Saudi Shi’ite cleric, while the United Arab Emirates and Kuwait have backed Saudi Arabia in the diplomatic crisis that could deepen sectarian tension in the Arab world.

Bloomberg reported that the bearish wagers come as OPEC’s effective scrapping of output limits, Iran’s anticipated return to the market and the resilience of production from countries such as Russia raise the prospect of a prolonged global oil glut.
Head of Commodities Research at Goldman Sachs Group Inc, Mr. Jeffrey Currie was quoted as saying that the oversupply would continue into 2017, adding there is risk oil prices would fall to $20 a barrel to force production shutdowns if mild weather continues to damp demand.

The bearish outlook has prompted investors to buy put options , which give them the right to sell at a predetermined price and time at strike prices of $30, $25, $20 and even $15 a barrel, according to data from the New York Mercantile Exchange and the United States Depository Trust & Clearing Corp.
West Texas Intermediate (WTI), the United States benchmark, is currently trading at about $36 a barrel.
The data, which only covers options deals that have been put through the US exchange or cleared, is viewed as a proxy for the overall market and volumes have increased this week as oil plunged.
Investors can buy options contracts in the bilateral, over-the-counter market too.
They have bought increasing volumes of put options that will pay out if the price of WTI drops to $20 to $30 a barrel next year, the data shows.

The largest open interest across options contracts – both bullish and bearish – for December 2016 is for puts at $30 a barrel.
The number of outstanding contracts – or open interest – below $30 a barrel is relatively small. But the open interest for June 2016 put options at $25 a barrel has nearly doubled over the last week.
Investors have even bought put options that will pay if WTI drops below $15 a barrel by December next year. The volume of financial bets at that level is tiny – 640,000 barrels in total.

Investors buy put options not only to bet that prices will drop, but they also take them as insurance. For example, long-only equity investors, which buy the stock of companies such as Exxon Mobil Corp. and Royal Dutch Shell Plc, often hedge their portfolios by buying put options that will profit if prices drop.
WTI fell below $34 a barrel on Monday, approaching an 11-year low. On Tuesday, United States oil futures for February delivery rose to as high as $36.26 a barrel.

In London, benchmark Brent crude plunged to $36.04 on Monday, its lowest since 2004, before rebounding to as high as $36.72 a barrel on Tuesday.
“Overall it’s still very bearish,” Gareth Lewis-Davies, a London-based energy strategist at BNP Paribas SA, was quoted as saying.

 

 

[ThisDay]