Oil investors are buying contracts that will only pay out if crude rises well above $100 a barrel over the next four years — a clear sign some believe today’s bust is sowing the seeds of the next boom.
The options deals, which brokers said bear the hallmarks of trades made by hedge funds, appear to be based on the belief that current low prices will generate a supply crunch as oil companies cut billions of dollars in spending on developing fields. The International Energy Agency forecasts that non-OPEC supply will suffer its biggest decline in more than two decades this year.
“The market faces a supply crunch in the next 24 months,” said Francisco Blanch, head of commodities research at Bank of America Merrill Lynch in New York. “Some hedge funds are betting that oil prices will need to rise sharply to bring demand down again — that’s why they are buying deep out-of-the-money call options.”
Over the last month, investors have bought call options — giving the right to buy at a predetermined price and time — for late 2018, 2019 and 2020 at strike prices of $80, $100 and $110 a barrel, according to data from the New York Mercantile Exchange and the U.S. Depository Trust & Clearing Corp.
Even before the most recent flurry, some investors had already built super-bullish positions. The largest number of outstanding contracts — or open interest — across both bullish and bearish options contracts for December 2018 is for calls at $125 a barrel. For December 2020, it’s for $150 calls.
Earlier this month, one investor bought more than 4 million barrels worth of call options at $110 and $80 a barrel for 2019 and 2020 in several transactions. In addition, another 800,000 barrels worth of $60 a barrel call also changed hands. The deals are public because of new regulations introduced in the U.S. by the Dodd-Frank Act. The disclosures don’t reveal the final buyer.
Funds making the trades aren’t necessarily expecting prices to jump as high as $100 to $150 a barrel, as the value of their call options will increase even if prices rise far less. These kind of options speculators are buying are often seen as lottery tickets because of they offer an outside chance of very large returns.
The options deals suggest sentiment is starting to shift from worry about oversupply to concern about shortages as demand begins to outstrip production — the traditional boom and bust commodities cycle.
“Large spending cuts on the back of low oil prices will lead to the demand and supply gap widening from 2018 onwards, if not earlier,” Abhishek Deshpande, oil analyst at Natixis SA in London, said. “This is likely to push oil prices up as early as 2017,” he added.
There are also reasons to be skeptical that this year’s rally from less than $30 in January to more than $50 today will be sustained. Production outages in Canada and elsewhere will probably prove temporary, U.S. shale producers may bring fields back on line as prices rise and global stockpiles remain well above historical averages.
Last year, some investors took the opposite bet, buying large amounts of bearish put options that would only pay if prices plunged below $30 a barrel. When West Texas Intermediate oil briefly fell in February to a 12-year low of $26.05 a barrel, the value of those options surged and speculators cashed in.
Davy on Sun, 12th Jun 2016 6:10 am
The chances of an oil price spike or good but a longer term rally or sustained higher prices are not. It is the economy stupid as the saying goes. This economy is poised to go down. It has been going down on multiple levels but there has been many other levels where we still see froth. The global system still has activity. We have plenty of forces still in play supporting economic activity. A concerted effort by central banks, as all of us know is keeping activity going especially in the financial sector and this sector spills out into commodities and other sectors.
The big issue is debt and deflation and like depletion they are not sleeping. The extend and pretend environment of not recognizing bad debt but instead rolling it over with tricks and gimmicks eventually hit diminishing returns when limits are hit. Worse than diminishing returns is the actually damage done when too much bad debt accumulates. China is a case in point. China has never realized bad debt, ever. The US has a variety of debts that are suspect too. Student loans and subprime lending are just a few.
Oil lives within an economy and this economy is in debt deflation. How is oil going to enter a long term price rise in an economy in deflation? It can’t. Systematic deflation means the oil will drop in value with time just as everything else will. Oil will likely maintain a higher value relative to other values but that is not the same thing as high prices. Demand destruction is very much alive. Supply is suffering but is supply suffering fast enough? Who knows? What is clear is this appears in many ways to be a demand and supply destruction period.
Bubbles deflate and when they deflate the bad fish float to the top. You can’t take a bubble like 08 and reflate it for several years then expect to reflate another bubble. We are done with economic bubble bullets as NIRP and other gimmicks attest to. Oil lives in this world of bubbles and bubble deflation. We are in a new normal that came from a new normal. In other words normal price discover and fundamentals were thrown out with the bath water long ago. We are in a fog of manipulation today that is surreal. Finance is surreal to begin with but these days it is special.
shortonoil on Sun, 12th Jun 2016 6:34 am
“Oil investors are buying contracts that will only pay out if crude rises well above $100 a barrel over the next four years”
This is absolute total bull shit! There is not one contract out over $55 to the end of March 2020. Who do they think they are kidding?
http://futures.tradingcharts.com/marketquotes/CL.html
When the truth isn’t good enough, it must then becomes necessary to lie!
joe on Sun, 12th Jun 2016 8:38 am
Yup, sounds about right. Boom and bust, just like it was in the begining so shall it be in the end. Two things are certain. 1 oil will go up as well as down in the age of heavy oil. 2 science better genetically modifiy humans to breath co2 instead of oxigen.
onlooker on Sun, 12th Jun 2016 8:54 am
These oscillations in Oil price were predicted by Peak Oil theory. The US economy and World economy could not sustain itself with $100 dollar Oil for any lengthy period of time. In fact last time it reached that level in 2008 say some quite violently negative reactions. Expect to boom and bust cycle to continue to weaken all economies.
penury on Sun, 12th Jun 2016 10:17 am
Remember “Truth is the first casualty of war” ans trust me the economic war being conducted currently is just as deadly as a shooting war.
onlooker on Sun, 12th Jun 2016 10:34 am
Penury, I think the real economic war being conducted is Nature vs. Humanity. And Nature has never lost a war.
yoshua on Sun, 12th Jun 2016 11:49 am
Our politicos lie to us. That is their freaking job. They have been doing a great job so far.
Despite an oil price spike that caused a financial collapse, failed economies and failed states… and then an oil price crash that has made oil producers insolvent… our politicos are still smiling and telling us that everything is just fine.
Most people still believe that oil depletion is a myth.
shortonoil on Sun, 12th Jun 2016 7:58 pm
“and then an oil price crash that has made oil producers insolvent… “
By our calculations the world wide petroleum industry lost $1.3 trillion during 2015. Even though there has been a recovering in price (to some extent; 20% on a $100) the losses will be as great or greater in 2016. The reason is because producers have been accessing the very best since the price fell in 2014. It gets a lot more expensive from here, on down!
makati1 on Sun, 12th Jun 2016 8:14 pm
Lies, damned lies and news reports…
“Once upon a time…” presented as truth by our ‘news’ services.
shortonoil on Sun, 12th Jun 2016 8:42 pm
” It gets a lot more expensive from here, on down! “
PS: and a lot more damaging to the general economy.
Stabilizer on Sun, 12th Jun 2016 11:56 pm
The industry reaction to 3% overcapacity was to shut down 70% of drilling. Meanwhile, demand has grown steadily at 1.6% per year for 2 years. The same low CEOs that overbuilt and created 3% overcapacity also fired 2/3 of the employees – 2 years after reaching the point where companies had finally succeeded in convincing people to work in the oil patch again, that it wasn’t an industry where poor planning by the CEOs results in overcapacity and they respond by firing all the employees while the ones who made the dumb moves get huge retention bonuses. Yep, $100 oil is coming. Won’t go away as fast this time either. Lots of hands are finding they LIKE not working in the patch.
Stabilizer on Mon, 13th Jun 2016 12:07 am
Oil always has been cyclical and always will be. The elasticity of oil demand is almost the inverse of the elasticity of oil supply. Oil related companies are priced by the price of oil. There are two main reasons for this:
1. Oil price determines profit in most oil companies. The best oil-related business decisions can’t produce exorbitant profits when prices are low, and the worst oil-related business decisions can’t prevent exorbitant profits when prices are high. In plain language, oil industry profits have nothing to do with oil-related decisions by the CEOs
2. Oil patch CEOs aren’t the same caliber as CEOs in industries where decisions matter. For oil patch companies to make profits unrelated to oil price, CEOs would have to be capable of utilizing the cash flow during good years to generate cash during bad years, and they would have to quit firing all the experience every downturn.
yoshua on Mon, 13th Jun 2016 6:12 am
The “petroleum industry lost $1,3 trillion during 2015”.
“Add in syndicated bank loans and total borrowing by the oil-and-gas sector rose to $2.5 trillion at the end of 2014, up from $1 trillion of outstanding debt at the end of 2006, according to the Switzerland-based Bank for International Settlements.” WSJ
Looks as if Ponzi Financing is the only thing that will keep the petroleum industry alive from now on.
At the same time the central banks will be busy printing money to keep the stock markets and financial institutions alive.
James on Mon, 13th Jun 2016 12:06 pm
When I see the Opec country need oil’price from $65 to $100 per/b to balance the country’s budget.I belive oil’s price with more room to go up. Two years ago how many people belive the oil can hit $26? Four months ago how many people can say oil price reach $50 at June?