Oil Options Hit Highs as Verleger Predicts 44% Plunge
Published: 21 Sep 2009
(BloombergTV) -- Oil traders are paying more than ever in the options market to
protect against a plunge in crude prices.
The gap between prices of options betting on a decline and those that would
profit from a rise in oil widened to a record 10 percentage points, according
to five years of data compiled by Banc of America Securities-Merrill Lynch.
Crude stockpiles in the U.S. are 14 percent larger than a year ago and OPEC is
pumping 600,000 barrels a day more than the world needs, according to the
International Energy Agency.
While the recovery from the first global recession since World War II pushed
oil up 62 percent this year to $72.04 a barrel in New York, growth alone isn’t
likely to erode the glut by the end of next year because production exceeds
demand, data from the Paris-based IEA shows. A drop in prices would penalize
companies from Exxon Mobil Corp. to BP Plc and exporters Russia and Saudi
Arabia.
“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,
Pennsylvania, said in a telephone interview. “It was a very weak summer. We
came out with more gasoline than we started.”
Right to Sell
Options granting the right to sell, or put, oil in December below current
prices have a so-called implied volatility of 54.3 percent, compared with 43.3
percent for the equivalent options to buy, or call, data from the New York
Mercantile Exchange show.
The premium for December and other put options shows “the market is worried,”
said Harry Tchilinguirian, a senior oil analyst at BNP Paribas SA in London.
“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.
Demand for puts may be caused by speculators betting on lower prices or by
producers hedging against a decline in the value of their oil, Tchilinguirian
said.
Oil inventories totaled about 2.8 billion barrels at the end of July within the
30 nations of the Organization for Economic Cooperation and Development,
according to the IEA. The total is equal to 62 days of demand, and 4.6 percent
more than the same time last year.
Brimming Stockpiles
Supplies are brimming on both sides of the Atlantic. U.S. distillate fuel
inventories, which include heating oil and jet fuel, are the highest since 1983
at 167.8 million barrels, according to the Energy Department. U.S. gasoline
supplies are 2.2 percent greater than they were in late May, the start of the
peak-demand summer driving season, at 207.7 million barrels.
Gasoil stockpiles, the European equivalent of heating oil, near Europe’s
refining hub of Rotterdam reached a record 3.03 million tons (23 million
barrels) on Sept. 10, according to PJK International BV of Oosterhout, the
Netherlands.
More than 60 million barrels of fuel is stored on tankers offshore, according
to the IEA.
“There’s all this heating oil with no place to go,” Philip Verleger, a
professor at the University of Calgary and head of consultant PKVerleger LLC,
said in a phone interview. “I’m fairly certain we’ll see prices in the $30s
this year.”
