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Page added on October 1, 2017
Want to bet on $100 crude oil in 2018? Some investors already have
When crude prices crashed in early 2016 to $27 per barrel, most industry executives said the world had seen the last of oil at $100.
Almost two years later, as a global crude glut shows signs of receding, the oil options market has seen a spike in activity at $100 a barrel, indicating some oil bulls are betting the price could trade around that level by this time next year.
The oil price has hit its highest since 2015 and after having shied away from $60 a barrel this week, the chances of a rally beyond this point seem remote.
But that hasn’t stopped some punters from snapping up December 2018 buy options at $100 at bargain-basement prices.
Open interest in December 2018 $100 call options , which expire next October, has trebled in the space of a week to more than 30,000 lots, on a par with the most active contract among December 2017 options – $60 calls.
While this data alone does not signal whether investors have bought or sold these contracts, it does show that the prospect of oil being near $100 in just over a year is not as distant as even some of the more optimistic bulls may have thought.
What’s more, this is now the largest strike for the whole of 2018.
Even if $100 is not on the cards right away, there is a decent case building for a bull run in the coming months. Demand is set to cross the threshold of 100 million barrels per day for the first time next year, while supply from OPEC looks likely to remain restricted for at least part of 2018.
December call options at $90 a barrel have attracted a swell of trader and investor interest as well.
Three years of flagging prices have prompted companies to cut their exploration budgets by billions of dollars, meaning the pipeline of new projects also looks fairly dry.
“We are extremely confident the oil space will be a good place for investors to be over the next three to five years,” said Richard Robinson, who manages the global energy fund of Ashburton Investments, which has around $10 billion in assets under management.
“Historically, a poor period featuring a lack of spending, as we have witnessed over the past five to eight years, has been followed by an equally long period of outperformance,” said Robinson, who is not predicting $100 oil.
“The lack of spending always comes home to roost. With inventories soon to balance, the psyche of the market should move and the questions posed by investors will also change. With the dynamics currently in place, we expect to witness significant opportunities as the oil price moves higher.”
That said, in a recent Reuters monthly oil poll, even the most optimistic forecast is for $80 a barrel by 2020.
Part of the reason for this caution is the risk of producers both in and outside the Organization of the Petroleum Exporting Countries, in particular U.S. shale oil, pouncing on any sharp rises in the price to raise their output.
OPEC and 11 of its partners, including Russia, have committed to cutting output by 1.8 million barrels per day (bpd) between January this year and March 2018 to force a three-year-old overhang of unused oil to drain, thereby boosting prices.
“NOT ENOUGH OIL AT $50”
Yet Energy Aspects, a consultancy, points out that demand is “soaring” right now, set to rise to 100 million bpd next year.
“If demand does not slow, the world will need far more oil than the (shale) oil sector can offer at $50. We are not saying that there is too little oil. There is plenty,” the company said in a recent note.
“Our point is there is not enough oil at $50. We don’t deny that demand growth can slow materially from around 2026 … But legacy projects peak this decade, well before demand is likely to, setting up for an imbalance.”
Hedge fund manager Pierre Andurand, who manages around $1 billion, told the Financial Times in August that $100 oil was a distinct possibility.
“In 2014, after four years at being around $110 a barrel, most analysts were saying we’d never see prices go back below $100 … Now everyone is arguing we’re never going back there, but I don’t really buy that the cost of production has gone down structurally or that electric cars will have a big enough impact on demand,” he told the FT.
After almost no change in world inventories in the first six months OPEC’s deal was in place, stock levels finally appear to be dropping and the physical markets, often a barometer of the health of the futures market, are showing the kind of strength not seen for at least three years.
Investors have positioned for a sustained rise in the price of Brent crude. Money managers now hold more bullish positions in Brent futures and options than at any time since February, having more than doubled these from June’s 18-month low.
U.S. investor Andy Hall, nicknamed the “God” of the energy markets, closed his flagship $2 billion Astenbeck Master Commodities Fund in August, just as the price of crude broke above $52. The question now is how long the patience of these would-be optimists might last.
11 Comments on "Want to bet on $100 crude oil in 2018? Some investors already have"
rockman on Sun, 1st Oct 2017 11:17 am
“When crude prices crashed in early 2016 to $27 per barrel, most industry executives said the world had seen the last of oil at $100.” I’m sure “industry executives” (whoever the f*ck they are) said oil prices would never recover much when prices fell 80% from 1865 to 1873. And then it doubled in price by 1894. And said oil prices would never recover much after prices fell 60% from 1894 to 1912. And then the price increased 100% by 1920. And some said oil prices would never recover much after prices fell 70% from 1920 to 1938. And then the price increased 700% by 1980. And then some said oil prices would never recover after prices fell 80% from 1980 to 1998. And then prices doubled by 2000 after which they increased about 400% by 2011. And then prices fell 70% in 2014 at which time many “experts” were predicting prices falling from $28/bbl to below $20/bbl And now 3 years later prices have increased around 80%. And today have “experts” predicting a price decrease of more then 50% in the next few years.
Yes indeed, a long history of easy oil price predictions that any fool make. Just as many fools have tried. LOL.
Data from
http://www.businessinsider.com/timeline-155-year-history-of-oil-prices-2016-12
Outcast_Searcher on Sun, 1st Oct 2017 11:23 am
“While this data alone does not signal whether investors have bought or sold these contracts, it does show that the prospect of oil being near $100 in just over a year is not as distant as even some of the more optimistic bulls may have thought.”
For every buyer, there must be a seller. Long shot speculators are doing the buying. People willing to get a little income to cover that long shot are doing the selling. They may or may not be fully hedged.
It’s not that complicated.
Predicting these things isn’t easy. If it were, the blog and energy newsletter “advice” writing clowns would simply put their money where their mouth is and make a fortune over time.
Cloggie on Sun, 1st Oct 2017 11:25 am
Expect hugely oscillating oil/fossil fuel prices over the coming crucial 3-5 decades, for instance after the crash of the Permian bassin in perhaps 8 years, when oil hunters will need to setup shop in a different territory outside the US. Or in the North Sea, where endless coal resources are prent that can be gasified.
brent on Sun, 1st Oct 2017 12:46 pm
Shale oil is not profitable at 100 dollars a barrel. So I am skeptical of how fast the shale oil companies will come back after they have been losing money for so long.
Outcast_Searcher on Sun, 1st Oct 2017 5:28 pm
brent – do you even know what “shale oil” is? Any credible source will tell you that most fracked sources are indeed plenty profitable at $100 a barrel oil.
Why just make stuff up. Do you think no one can read, even if you don’t bother?
http://www.businessinsider.com/how-much-it-costs-both-saudi-arabia-and-the-us-to-produce-oil-2017-3
At an estimated 2016 cash cost of under $24 for US shale oil, I think they can manage to squeeze out just a WEE bit of profit at $100.
LOL
energy investor on Sun, 1st Oct 2017 6:26 pm
Outcast…do you know what “full cycle costs” are?
How many shale companies are repaying their loans from this bounty of USD50/bbl oil? How many are paying any dividends?
Mick on Sun, 1st Oct 2017 10:38 pm
I’ll make a bet on oil around $40 for much of 2018.
Mick on Sun, 1st Oct 2017 10:49 pm
Unless n.k and the u.s throw a few nukes at each other then oil price would be the least of our worries
GregT on Sun, 1st Oct 2017 11:12 pm
Outcast said:
“Why just make stuff up. Do you think no one can read, even if you don’t bother?”
According to your link Outcast:
‘When crude oil prices crashed into the $20 range early last year, it had most oil-producing nations quaking in their boots.”
Talking about making stuff up. Other than during recessionary periods, oil prices have been in the $20 range for the better part of the last 70 years, in inflation adjusted US dollars.
Reading, and being aware of reality, are obviously two very different things.
rockman on Mon, 2nd Oct 2017 12:21 pm
First just a reminder that stating the shale plays are (or are not) viable a $X/bbl is complete bullsh*t and such a stat only appeals to the feeble minded. LOL. No play ever has been or ever will be economic at some made up price per bbl. There were many shale wells that lost money when oil was $100/bbl just as there are profitable ones being drilled at $50/bbl. The only difference the price of oil makes is how many shale prospects can be justified to drill.
“How many shale companies are repaying their loans from this bounty of USD50/bbl oil?” Most as indicated by the great decline in the number of all petroleum companies filing bankruptcies. In reality compared to the $trillion+ invested by companies the amount of debt involved in bankruptcy filings so far of around $85 billion is relatively small.
“How many are paying any dividends?” Many. Here’s a couple of lists. Unfortunately you have to sign on to an account to get details. But the 2 largest shale players, EOG and Pioneer Resources, have paid dividends continuously even during the oil price collapse. And EOG, not only the biggest but also the most aggressive shale player TODAY, has a stock price currently higher then anytime prior to April 2014. And has increased in price/share about 12% during this last month coincident with slightly higher oil prices.
The stocks of the shale players took a hit like all the petroleum companies not involved heavily in that shales. But the vast majority are still is business and still drilling.
http://www.dividend.com/dividend-stocks/basic-materials/independent-oil-and-gas/
http://www.dividend.com/dividend-stocks/basic-materials/oil-and-gas-drilling-and-exploration/
peripato on Tue, 3rd Oct 2017 6:24 am
Just in time for the Saudi Aramco IPO…