Reuters
Singapore


Investors are betting on the oil price staying lower for even longer after Opec’s decision to ditch a formal production ceiling, pushing US crude futures for delivery nearly 10 years away below $60 a barrel.
This could possibly harm the ability of US shale producers, among the casualties of Opec’s strategy of pumping hard to retain market share, to lock in profitable prices for future deliveries.
US crude futures for front-month delivery fell below $40 per barrel yesterday after the Organization of the Petroleum Exporting Countries failed last week to agree on an output target to reduce a bulging oil glut that has cut prices by over 60% since 2014.
In the run-up to the Opec decision, oil derivatives showed investors had, unusually, been willing to pay more to protect against a surprise rally in the price, than a surprise fall.
That bet has now been unwound, meaning they are once again expecting a higher likelihood of further declines than that of a bounce back. The most popular options contract is one that gives the holder the right to sell crude oil futures at just $35 a barrel.
“Oil is going to make lower lows and lower highs for the foreseeable future and, in terms of market reaction post-Opec, I’m not surprised, but it does leave the door open for prices to fall,” Gain Capital analyst Fawad Razaqzada said.
As recently as late November, US crude for December 2022 delivery and onward was trading slightly above $60 per barrel, but following the Opec meeting, contracts out to December 2024 are below $60, trading data shows.
“It means that there is a loss of confidence in the market after Opec, and people expect low prices to last longer”, said Oystein Berentsen, managing director of crude oil at Strong Petroleum in Singapore.
“Hence the back of the curve will be under pressure from producer hedging via selling the back of the curve to limit loss or lock in a small profit to reduce risk.”
Goldman Sachs said after the Opec meeting that it expected oil prices to remain “lower for longer,” with a risk that oil prices could fall as low as $20 per barrel.
“The rising probability that markets may need to adjust through ‘operational stress’, when surpluses breach capacity, leaves risks to our forecast as skewed to the downside in coming months, with cash costs near $20 per barrel,” the bank said.
Bearishness has been brewing in the derivatives market for some time. Options data shows holdings of December 2016 put options at $25, $30 and $35 a barrel have risen 41% in the last two months and open interest in those three contracts now equates to nearly 90mn barrels of oil.
“Price levels just aren’t high enough for many shale producers to hedge,” said Mark Keenan of Societe Generale.
“In addition, due to the short production timelines associated with many shale wells because of their steep well depletion rates, there is little need to hedge five years or more into the future.”