Oil's 2-Month Drop Leaves traders who bet on $100 oil with near-worthless investments.
Elmat: Don't bet against Ethanol! :-)
Oil's 2-Month Drop Leaves Traders With Worthless Bets (Update2)
Nov. 21 (Bloomberg) -- Crude oil may extend a two-month decline as concern about shortages eases, leaving traders who bet on $100 oil with near-worthless investments.
``People who have put out extreme price scenarios have become very quiet,'' said Craig Pennington, the head energy analyst at Schroders Plc in London, which manages $206 billion in assets.
Exxon Mobil Corp. Chairman Lee Raymond told a U.S. Senate hearing on Nov. 9 that prices have probably peaked. Boone Pickens, a Dallas hedge fund manager who more than a year ago predicted oil would reach $60, says he expects prices to drop toward $50 a barrel as record prices lead to lower demand.
Crude oil for January delivery traded at $57.80 a barrel in New York at 8:21 a.m. London time. That's down 18 percent from a record $70.85 a barrel in August, when Hurricane Katrina struck the U.S. Gulf coast and shut down about a fourth of U.S. oil and gas production. Hurricane Rita in September further damaged rigs and refineries.
Hedge funds, often blamed for soaring prices, have their biggest bet against oil in 2 1/2 years, selling $3.2 billion of futures contracts in New York, according to data from the Commodity Futures Trading Commission. Lower prices are easing pressure on bankrupt airlines such as Delta Air Lines Inc., while signaling an end to surging profits at the oil companies.
Oil markets for months had been rattled by calls for $100 crude oil. In March, Goldman Sachs Group Inc. analyst Arjun Murti said supply disruptions could send oil to $105 a barrel. He couldn't be reached to comment.
Worthless Options
The price of option contracts to buy crude oil for December delivery at $100 a barrel on the New York Mercantile Exchange peaked on Aug. 30 at 30 cents. The value of options, used by hedge funds to speculate on prices or by refiners to lock in supplies, has tumbled to 1 cent. The same contract for January has plunged from 49 cents in August also to 1 cent.
``We won't see increases like the one in the past two years,'' said Jacobo Penaranda, who helps manage about $4.6 billion at Barclays Fondos in Madrid. ``When oil approaches $70, things start getting difficult for the market to keep rising because governments have reacted by releasing emergency reserves.''
The governments represented in the Paris-based International Energy Agency on Sept. 2 said they would release more than 60 million barrels of oil reserves to avert shortages brought on by Katrina. It was only the second time in the organization's three decades of existence that it had done so.
`A Cap' on Prices
``As long as we have crude in emergency reserves, there's going to be a cap on how high prices can go,'' said Francisco Blanch, oil strategist for Merrill Lynch & Co. in London. Gasoline and heating oil prices are more vulnerable because of refining capacity constraints and the lack of emergency stockpiles, he said.
The ``cumulative'' increase in energy costs poses a risk to inflation, U.S. Federal Reserve policy makers said Nov. 1, when they increased the target for the federal funds rate by 25 basis points to 4 percent. U.S. consumer prices in October rose 0.2 percent, the slowest pace in four months, limited by cheaper gasoline costs, the government reported last week.
The drop in commodity prices isn't limited to oil. The Reuters/Jefferies CRB index of 19 commodities has declined for five weeks, losing 4.5 percent to 312.74. Its last five-week slide was in March 2003.
Not everyone has given up on higher prices. Jeffrey Rubin, chief economist at the Canadian Imperial Bank of Commerce in Toronto, Canada's fourth-largest bank by assets, said he's maintaining a forecast for oil to average $93 a barrel in 2007.
Demand Suffers
Oil consumption is suffering from the surge in energy costs, said OMV AG Chief Executive Wolfgang Ruttenstorfer, whose Vienna- based refining company is the largest in central Europe. U.S. gasoline prices on average surpassed $3 a gallon in September, a level not seen since 1981, after adjusting for inflation.
A slowdown in demand ``is much more drastic than anyone would have expected,'' he said in an interview on Nov. 11. Oil prices will stay around $50 to $60 for the next three years, until new investments in supply ``have the effect of bringing oil prices from $50 to around $30.''
Merrill's Blanch forecasts New York crude will cost between $40 and $45 by the end of the decade. Pennington of Schroders predicts crude will fall to $35.50 a barrel by 2010. BP Plc Chief Executive John Browne on Nov. 4 said prices should slide to $40 a barrel in the next few years.
Oil prices of about $60 a barrel in New York create incentives for producers in the Organization of Petroleum Exporting Countries, the source of more than a third of the world's oil, to invest in new capacity, said John Waterlow, an analyst at Wood Mackenzie Consultants Ltd. in Edinburgh.
OPEC Investments
OPEC in a report last week estimated that its members will spend $100 billion by 2010 to increase crude oil production, with another $60 billion earmarked for expansion and construction of new refineries.
``The panic is beginning to ebb,'' Waterlow said. ``Over time, we believe that increasing supply is becoming available.''
Investment from oil companies is rising too. Paris-based Total SA, Europe's largest oil refiner, in September said it will increase spending by at least 800 million euros ($940 million) in the next five years to make fuels in France. ConocoPhillips, the third-largest U.S. oil company, last week said it will increase spending next year by 4.7 percent to $11.1 billion.
Royal Dutch Shell Plc of The Hague and partner Saudi Aramco, the world's biggest oil company, are studying an expansion of a Port Arthur, Texas, refinery that would be the biggest in the U.S. in at least 25 years.
``We're starting to see a supply response to prices,'' Blanch said. ``There's clearly a lot of talk of investment to expand refining capacity. It's going to take a sustained period of high prices for that capacity to come into place, another four or five years.'' |
