The number of traders betting that oil prices will drop outnumbers the number of traders who believe they will rise by the largest margin ever. Some analysts believe prices will fall significantly lower in the near future – at least into the low $60 a barrel range – after soaring to $75 a barrel in August.
Supply has outrun demand this year as a global recovery has yet to accelerate. Yet, oil prices more than doubled from February to August and are up about 50% from where they started the year.
Now, many traders are positioning themselves to profit from a pullback. The gap between prices of options betting on a decline in prices and those that would profit as a result of a rise in oil has widened to a record 10 percentage points, according to five years of data compiled by Banc of America Securities-Merrill Lynch.
Put options, which give traders the right to sell oil in December below current prices have an implied volatility of 54.3%, compared to 43.3% for options to call, Bloomberg News reported. Implied volatility is estimated volatility of a security's price. Implied volatility generally increases when the market is bearish and decreases when the market is bullish.
Implied volatility is used in calculating an option's premium and right now the premium for December and other put options shows "the market is worried," Harry Tchilinguirian, a senior oil analyst at BNP Paribas SA (NYSE ADR: BNPQY) told Bloomberg.
"If puts are pricing higher than calls, we are looking at a situation where the market is more averse to the downside and is looking for more compensation" for the option, he said.
Perhaps the biggest reason the market is worried is that a generous supply of oil remains on the market, some of it piled up in offshore tankers. Meanwhile, the global economy is healing at a considerably slow pace with many analysts forecasting a so-called U-shaped recession for the United States – the world's largest petroleum consumer.
U.S. stockpiles of crude are 14% higher than they were a year ago, according to the International Energy Agency (IEA). U.S. distillate fuel inventories – which include heating oil and jet fuel –, according to the Energy Information Administration (EIA). That's the highest level since 1983.
As of Sept. 11, U.S. gasoline supplies are at 207.7 million barrels – 2.2% higher than they were in late May at the start of peak summer driving season, according to the EIA.
The story is much the same overseas where gasoil stockpiles – the European equivalent of heating oil -reached a record 23 million barrels on Sept. 10, according to PJK International BV, Bloomberg reported.
At the end of July, oil inventories in the 30 nations of the Organization for Economic Cooperation and Development (OECD) totaled about 2.8 billion barrels – 4.6% more than the same time last year, according to the IEA. More than 60 million barrels of oil are being held in tankers offshore.
The Centre for Global Energy Studies (CGES) in a monthly report that it expects high crude stockpiles will continue to constrain the market.
"The CGES expects little sustained upward pressure on oil prices over the remainder of this year and even next year prices are unlikely to rise much unless clear signals emerge that world is pulling out of recession in a sustainable fashion," the CGES said. "High inventories, particularly of middle distillates, are putting a ceiling on oil prices at the moment … and this will only lift once those inventories start to be drawn down."
The report also noted the Organization of Petroleum Exporting Countries (OPEC), which controls 40% of the world's oil supply, sees promoting economic growth as being more important than the short-term pursuit of higher prices.
"OPEC signaled its broad satisfaction with the current level of oil prices when it met in Vienna earlier this month," CGES said. "It recognized that sustainable upward price pressure will only come with economic recovery and rising oil demand.
Saudi Arabia's oil minister, Ali al-Naimi weeks ago told reporters that the cartel is more concerned with reinvigorating the global economy than raising oil prices.
"Economic growth is the name of the game, that's what's going to drive the price," said al-Naimi. "As long as economic growth is there, the price is going to go up."
OPEC has last year lowered its production quotas by 4.2 million barrels per day (bpd) – about 5% of global demand – hoping to put a floor under prices that plunged more than 80% from their record high above $147 a barrel last summer. The reduction was effective in halting the fall in prices, but even with the cuts supplies continue to grow.
Additionally, some OPEC nations have not strictly adhered to the mandate. The cartel's production exceeded its quotas by 1.2 million barrels a day in August, according to Bloomberg estimates.
The glut of oil on the market has some analysts wondering whether or not spooked speculators will hasten their retreat from the market.
"If ever there was going to be a retreat below $60 a barrel, it is now," Stephen Schork, president of consultant Schork Group Inc. in Villanova, Pa., told Bloomberg in a telephone interview.
Light, sweet crude for December delivery yesterday tumbled $2.33 a barrel, or 3.24% to settle at $69.71.
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