anybody want to sell me some more cheap NZO
Double or nothing: traders bet on oil reaching $US200 a barrel by year's end
Grant Smith in New York
January 8, 2008
THE fastest-growing bet in the oil market these days is that the price of crude will double to $US200 a barrel by the end of the year.
Options to buy oil for $US200 on the New York Mercantile Exchange rose 10-fold in the past two months to 5533 contracts, a record increase on any similar period. The contracts, the cheapest way to speculate in energy markets, have appreciated 36 per cent since early December, with crude oil futures reaching a record $US100.09 on January 3.
While analysts at Merrill Lynch and UBS say the slowing US economy will lead to the biggest drop in prices since 2001, the options show some traders expect oil to rise for a seventh consecutive year. Demand will increase 2.5 per cent this year, the International Energy Agency (IEA) says. US oil inventories fell to a three-year low on December 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 Simmons, the chairman of Simmons & Co International, an investment bank that focuses on energy. Inventories "are tight as a drum and I don't see how we get out of this box", he said in an interview on Bloomberg television 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 last year, or about the amount that Nigeria supplies, says the IEA, which advises oil-consuming nations. Demand from China alone will rise 5.7 per cent to 8 million barrels a day as imports expand to support an economy that is likely to grow 11 per cent.
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 20 years, is more than eight kilometres below the ocean surface and will take at least five years to develop.
Mexico's state oil monopoly, Petroleos Mexicanos, suffered a three-year, 40 per cent decline at its Cantarell field, the world's third-largest. Since December 2005, fighting in Nigeria has reduced production 11 per cent to 2.18 million barrels a day.
Crude futures rose 2 per cent in the first three trading days of the new year, closing at $US97.91 a barrel in New York on January 4.
"We haven't got to $US100 on just a whim," said Paul Horsnell, the 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 $US87.40 a barrel this year, a 21 per cent increase from last year's average.
The Nymex options, which give speculators the right to buy 1000 barrels of oil in December, are becoming a favourite for traders, even if they don't expect crude to reach $US200, 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 November 7.
The price of the options rose as high as $US550 last week before closing at $US300 on January 4. That amounts to 30c a barrel. The December futures to purchase 1000 barrels in December rose 3.5 per cent to $US94,010, or $US94 a barrel.
"The most common analogy used to describe options is that it represents insurance" against "low-probability" events, said Tim Evans, an energy analyst at Citigroup Global Markets.
Oil forecasters say there is no chance of $US200 crude, as the US, which consumes a quarter of the world's oil, slows. Prices will average $US78 a barrel this year, 20 per cent below the present level, and $US75 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 per cent.
Merrill Lynch and Morgan Stanley in New York expect the US economy, the world's largest, to slip into recession this year. The jobless rate rose to 5 per cent 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.
Oil was overpriced, given the outlook for the economy, said Jan Stuart, an analyst at UBS in New York. He forecasts an average price of $US74 a barrel this year, little changed from last year. Merrill Lynch's Francisco Blanch predicts $US78 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 on January 2.
But most strategists didn't foresee last year's 57 per cent gain. Crude traded at an average of $US72.36. A Bloomberg survey of 29 analysts in September 2006 forecast a median price of $US64.
"Going through $US100 means that people are seeking more protection against a higher number," said Michael Lewis, a strategist at Deutsche Bank in London. Deutsche Bank expects oil to fall to about $US80 a barrel.
Options trading indicated that the likelihood of crude reaching $US125 a barrel in December had almost doubled since December 25, to 18 per cent, Mr Lewis said.
While $US200 may remain an outside chance, Matthew Simmons has shown he is willing to make that bet. He wagered $US5000 with the New York Times columnist John Tierney in August 2005 that oil would average at least $US200 a barrel in 2010.
The latest assessment from OPEC, which produces 40 per cent of the world's oil, suggests prices will rise.
"There is enough oil in the market," Chakib Khelil, the president of the Organisation of Petroleum Exporting Countries, told reporters in Algiers at the weekend. Mr Khelil, who is also Algeria's Energy Minister, said rising prices were not OPEC's fault.
"You will see even $US200 oil in the next five years," said Jean-Francois Tardif, a senior portfolio manager at Sprott Asset Management in Toronto.