Could Oil Hit $100 Per Barrel by 2019?

December 21, 2016 10:40 AM
 
Oil Pumps

Call it a pre-Christmas lottery ticket, but someone in the oil market has been busy making a bold bet, buying contracts that will be profitable if oil surges again to $100 a barrel.

The $100 December 2018 call option -- a contract that gives the right to buy Dec. 2018 futures at $100 per barrel -- was the most traded contract on Tuesday across the whole ICE Brent market, the latest sign of resurgent optimism in oil.

The deal doesn’t mean the market believes $100 a barrel will happen, but as traders start to buy bullish options, it indicates that some are increasingly confident that the Organization of the Petroleum Exporting Countries can succeed in its quest to rebalance supply and demand.

“That’s a relatively cheap lottery ticket,” Ole Hansen, head of commodity strategy at Saxo Bank A/S, said by phone. “It’s clearly not the consensus in the market that we’re going to see a return to those prices any time soon, so it’s more likely a hedge against unforeseen geopolitical events during that time.”

Confidence in higher prices has returned since OPEC, Russia and other producers signed their first production cut deal in 15 years earlier this month. The International Energy Agency says that if the producers don’t cheat on their commitments, oil demand could overtake supply in the first half of next year, a significant change after three consecutive years of oversupply.

Still, the bet is tiny put in the context of the global oil market. Despite elevated trading in December 2018 $100 calls, the number held by investors didn’t rise much. Open interest in the options rose by 500 to almost 11,000, while options trading volumes fell to the lowest in about a month.

Hedge fund positioning data has showed renewed faith in higher oil prices recently. Bets that Brent crude prices will increase rose to the highest since 2011, when ICE’s public data began, in the week to Dec. 13. At the same time, bets that prices will decline fell to the lowest since October.

Options activity surged this month as OPEC and non-OPEC nations finalized a deal to cut production levels early next year. Investors bought more contracts to profit from higher WTI prices than ever before as analysts said options trading had “entered a new dimension.”

--With assistance from Javier Blas and Michael Roschnotti

To contact the reporter on this story: Alex Longley in London at alongley@bloomberg.net.

To contact the editors responsible for this story: Alaric Nightingale at anightingal1@bloomberg.net, John Deane

©2016 Bloomberg L.P.

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Comments

 
Spell Check

Trent J
Rural, NE
12/21/2016 02:26 PM
 

  No. The only reason price has risen as pathetically as it has is due to all of the OPEC nation jawboning. There will be no production cuts, there never are. They say one thing and do another. Oil EROI is falling rapidly for energy. We are getting to the point where there is no NET energy left in a barrel of oil. Peak EASY oil is gone for good. Cost of acquisition today is bleeding every once of net energy out of each barrel. EROI was roughly 100:1 in the 20's/30's (in other words you net 99 barrels free and clear for 1 barrel of energy used). By the 70's this ratio fell to 30:1 and today with fracking being used that ratio falls to 5:1. The economy cannot grow or even be sustained at an oil EROI of 5:1. The only reason we have been able to create an appearance of normalcy is b/c of the gargantuan amount of debt that has been created in order to fund the process. Look at it this way, if you were a oil producer and you were getting 10 barrels of oil out of the ground but also inputting 10 barrels would you continue to do so? No, there would be ZERO financial sense in doing so. A new form of energy must be created and if you think $200 a barrel oil solves the problem just light a match and let her go b/c the system/the people cannot afford $200 a barrel oil. Shale is inferior and uneconomic no matter how you look at it. Furthermore, the system has reached debt saturation as at this point with rising interest payments on debt, the appetite to continue financing a "bridge to nowhere" has reached its peak. With cratering demand globally and oil at historical highs in stored amounts. I predict seeing $25/barrel oil long before $100.

 
 

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