Oil Market Speculators Bet on $15 Per Barrel in 2016

As crude oil price continue to slide, global speculators are reported to be buying put options contracts that will only pay out if price drops to as low as $15 a barrel in 2017, the latest sign some investors expect an even deeper slump in energy prices.

The prices on Wednesday dipped below $35 per barrel for the first time since 2004, tumbling more than five percent as the row between Saudi Arabia and Iran made any cooperation between major exporters on cutting crude oil supply to the international market more unlikely.

The diplomatic rift between Saudi Arabia and Iran after the Saudi execution of a Shi’ite cleric, Nimr al-Nimris believed to have ended speculation that the Organisation of Petroleum Exporting Countries (OPEC) could agree to cut production to lift the price of oil.

Riyadh had called off diplomatic ties with Tehran over Iran’s response to the execution of the Saudi Shi’ite cleric, while the United Arab Emirates and Kuwait have backed Saudi Arabia in the diplomatic crisis that could deepen sectarian tension in the Arab world.

Bloomberg reported that the bearish wagers come as OPEC’s effective scrapping of output limits, Iran’s anticipated return to the market and the resilience of production from countries such as Russia raise the prospect of a prolonged global oil glut.

Head of Commodities Research at Goldman Sachs Group Inc, Mr. Jeffrey Currie was quoted as saying that the oversupply would continue into 2017, adding there is risk oil prices would fall to $20 a barrel to force production shutdowns if mild weather continues to damp demand.

The bearish outlook has prompted investors to buy put options , which give them the right to sell at a predetermined price and time at strike prices of $30, $25, $20 and even $15 a barrel, according to data from the New York Mercantile Exchange and the United States Depository Trust & Clearing Corp.

West Texas Intermediate (WTI), the United States benchmark, is currently trading at about $36 a barrel.
The data, which only covers options deals that have been put through the US exchange or cleared, is viewed as a proxy for the overall market and volumes have increased this week as oil plunged.

Investors can buy options contracts in the bilateral, over-the-counter market too. They have bought increasing volumes of put options that will pay out if the price of WTI drops to $20 to $30 a barrel next year, the data shows.