Traders say oil prices will drop

I observe that the number of traders betting that oil prices will drop outnumbers the number of traders, who believe they will rise by the largest margin ever. Some believe prices will fall significantly lower in the near future – at least into the low of $60 a barrel range after soaring to $75 a barrel in August.

Supply has outrun demand this year, yet oil prices more than doubled from February to August and are up about 50% from where they started the year. Now, many traders are positioning themselves to profit from a pullback. The gap between prices of options betting on a decline in prices and those that would profit as a result of a rise in oil has widened to a record 10 percentage points, according to five years of data compiled by Bank of America Securities-Merrill Lynch.

Put options, which give right to sell oil in December below current prices have an implied volatility of 54.3% compared to 43.3% for options to call. Implied volatility generally increases when the market is bearish and decreases when the market in bullish. If puts are pricing higher than calls, we are looking at situation where the market is more averse to the downside and is looking for more compensation.

Perhaps the biggest reason the market is worried is that a generous supply of oil remains on the market, some of it piled up in offshore tankers. US stockpiles of crude are 14% higher than they were a year ago, according to the International Energy Agency (IEA). US gasoline supplies are 2.2% higher than they were in May at the start of peak summer driving season. The story is much the same where gasoil stockpiles – the European equivalent of heating oil reached a record 23 million barrels on September 10, according to PJK International BV, Bloomberg reported. The Centre for Global Energy Studies in a monthly report that it expects high crude stockpiles will continue to constraint the market.

Saudi Arabia’s oil minister, Ali al-Naimi weeks ago told reporters that the OPEC is more concerned with reinvigorating the global economy rather than oil prices. But according to Bloomberg estimates, the cartel’s production exceeded its quotas by 1.2 million barrels a day in August.