After oil passed $60 a barrel for the first time in six months, the New York Mercantile Exchange’s fastest-growing options trade in July is for a 18 percent drop.
The number of options to sell oil at $50 a barrel for July settlement rose 22 percent last week to 24,948. Traders expect prices to fall because U.S. crude inventories are 1.8 percent below the highest level in two decades, the International Energy Agency says demand is falling the most since 1981, and there’s enough unsold crude stored in offshore tankers to supply the U.S. for a week. Oil traded as high as $62.16 today in New York.
“Oil prices are rising way ahead of reality, way ahead of fundamentals,” said Eugen Weinberg, a senior commodity analyst at Commerzbank AG in Frankfurt. “It would be more reasonable for prices to drop a little and correct to $50 or below.”
Crude jumped as high as $62.26 a barrel on May 20 on optimism that the worst of the global recession and the Organization of Petroleum Exporting Countries agreed to cut supplies by the most on record. Now, economic reports are increasing speculation that the world economy will continue to sputter, and OPEC, which meets May 28 in Vienna, has yet to complete the supply curbs it promised in December.
The number of contracts to sell July oil at $50 a barrel, or so-called put options, tripled to 24,948 on May 21 from May 7, according to Nymex data. The second most-popular contract for July settlement is the right to sell at $40, with 23,254 outstanding. There are almost twice as many positions that profit if oil falls as low as $40 a barrel as there are bets on a rise to $70.
Japan’s economy, the world’s third-largest oil consumer, shrank at a record 15 percent pace last quarter as exports declined 26 percent. The European economy contracted at the fastest pace in 13 years, and the World Bank said optimism for an economic recovery in China may be “premature.” The U.S. and China are the biggest oil users.
“Given the high level of crude inventories and contraction in activity in advanced economies, we still expect a large correction from these levels,” said Harry Tchilinguirian, the senior oil market analyst at BNP Paribas in London. “A low $40s level is still possible” before the end of September, he said.
Oil traded as low as $59.53 today in New York on speculation that OPEC won’t announce more production cuts this week even as the global recession curbs fuel demand. Among oil analysts, 25 out of 27 surveyed by Bloomberg predict OPEC will maintain a target of 24.845 million barrels a day at the Vienna conference this week.
The 11 OPEC members outside of Iraq produced 25.81 million barrels a day in April, an increase of about 225,000 from March and the first increase in nine months, according to OPEC’s latest monthly report. Those 11 collectively made 77 percent of the 4.2 million barrels a day of planned output cuts, down from a revised 82 percent for March.