Worries that crude oil prices may decline are causing the number of put contracts to rise as speculators place bets and owners hedge their longs.
Open interest in the June $50 and $60 crude futures puts rose to 129,000 contracts on April 15th. On the flip side call options as bets on $100 oil fell to only 49,000 contracts. Puts now account for 55% of all June options contracts compared to 51% a year earlier. Prices for put options are 24% higher than equivalent call options.
Tanker tracker, Oil Movements, says that OPEC shipments rose to 29.2 million barrels in March and will rise another 0.9% for the four weeks ending on May 1st. Addison Armstrong, director of market research at Tradition Energy said, "Forget China and India for a minute. The U.S. remains the biggest consumer and U.S. demand has not recovered."
The EIA projected U.S. demand will decline -9.4% to average 18.84 mbpd in 2010. This is down from a record 20.8 mbpd in 2005. The U.S. still uses more than twice as much crude as China with India the fourth largest consumer.
The IEA's most recent estimate suggests consumption in the 30 OECD nations (developed world) would decline -8.3% to 45.4 mbpd. They now believe that demand in the developed nations has peaked and will never again reach those prior levels.
The IMF expects the U.S. to grow at 3.0% GDP through 2011 while the developing nations will grow at a 6.0% rate. Most of that growth will be from China, which grew at a 11.9% rate in Q1.
John Kilduff, the rotating bull/bear on oil prices depending on the day of the week, is now targeting $100 as the recovery gains traction. He believes the industry will be caught flat footed when demand suddenly spikes.
Kilduf appears unconcerned by the rise in U.S. crude supplies for 10 of the last 11 weeks. Inventories are now +5.1% higher than the five-year average while demand is still down. The U.S. produced 5.53 mbpd in March and the most since March 2005 thanks to the pickup in the Bakken and new production from the deepwater gulf. This is expected to be temporary and overall production is expected to decline again in 2011. Oil rigs exploring for oil in the U.S. rose to 506 last week and that is the highest since March 1991 according to Baker Hughes.
The ICAP Shipping report last week suggested Iran may be storing as much as 30 million barrels of oil on tankers. The U.S. has been leaning on Iran's crude trading partners to buy oil elsewhere in order to pressure Iran to accept U.N. demands. Apparently it is working. Eventually Iran will discount their crude to the point where countries friendly to Iran, like China, will decide it is worth the risk to anger the U.S. in order to acquire some cheap oil.
Traders need to realize that futures tend to climb the stairs but drop by elevator and you never know when that elevator ride will begin. Just as prices over shoot the top they tend to over correct to a bottom.
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