CRUDE OIL and natural gas producers are scrambling to "lock in" prices by buying insurance against further drops in costs, as oil prices yesterday hit a fresh three-month low of $118 (€76.33) a barrel.
Oil prices have fallen almost 20 per cent from last month's record $147.27 a barrel, offering the prospect of a respite from global inflationary pressures and boosting US equities. The Dow Jones index was up 210 points by midday in New York yesterday.
In the options market, for every buyer of insurance against a rise in prices in 2009 there were almost 10 buyers of protection against a fall in prices. Traders said strong buying of put options - contracts that give holders the right to sell crude oil at a predetermined price and date - might be exacerbating the fall in oil prices.
The options' originators, such as Wall Street banks, need to sell futures - pushing down prices - to hedge their option positions.
The number of financial bets providing insurance against a fall in prices below $100 a barrel before the end of the year has more than doubled in the past six weeks, according to the New York Mercantile Exchange. There were more than 46,000 outstanding contracts for Nymex December 2008 put options at $100 a barrel, up about 135 per cent from late June. There has also been strong buying of put options for late 2009 at prices of about $100 a barrel.
Traders said a single market participant, believed to be a Latin American national oil company, had in the past 10 days taken a large position in put options to protect itself against a drop below $70 by December 2009.
Producers' interest in buying insurance against further drops comes as the fundamentals of supply and demand in the crude oil market appear to be easing.
Gareth Lewis-Davies of investment bank Dresdner Kleinwort said that - as well as signs of demand weakness, particularly in the US but also in Europe and Japan - there had been a jump in production by the Organisation of the Petroleum Exporting Countries (Opec) as Saudi Arabia ramped up its output to a 25-year high.
"Following a period of production reduction in 2007, which reduced global inventories, Opec has increased its output annually since December of last year and Saudi's actions over the last two months have further contributed to global oil supply growth," Mr Lewis-Davies said.
But analysts say non-Opec output growth is lacklustre due to falls in production in Russia, Mexico and the North Sea, and demand is still robust in emerging countries such as China and India.
The surge in the buying of put options is a big shift from only a few weeks ago when airlines and utilities scrambled to buy contracts to protect themselves from further rises. Investors were also keen buyers of options contracts that would be profitable if prices jumped above $200 a barrel.
- (Financial Times service)
