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Someone Bets Big On $15 Crude As OPEC Forecasts Oil Demand Slumping Until 2020
In OPEC's latest annual World Oil Outlook released on Wednesday, the now defunct cartel (courtesy of Saudi Arabia's insistence on vetoing any production limit) said that demand for its crude will slide to 2020, as rival supplies continue to grow. On the supply side, OPEC said it would need to pump 30.7 million barrels a day by the end of the decade, which is 1.7 million barrels more than it projected a year ago but well below, or some 1 million barrels less than the group pumped in November.
As Bloomberg notes, this latest forecast underlines the struggle faced by OPEC as it seeks to defend market share against a surge in output from rivals such as the U.S. and Russia. As a reminder, one of the most unexpected outcomes of the recent collapse in oil prices is that while the Saudis had hoped non-OPEC production would plunge, the opposite has happened in the race to the bottom in which Russian oil production just hit a record while US shale production has remained steady even as the number of oil rigs has plunged to multi-year lows.
"Although lower oil prices continue to foster some demand growth, their impact seems to be limited by other factors,” the group said. “The removal of subsidies and price controls on petroleum products in some countries and ongoing efficiency improvements will all likely continue restricting oil demand growth.”
As a result of the frail balance between declining demand and rising supply, the 30.7 million barrels of daily output needed from 12 of OPEC’s members in 2020 is about 300,000 a day less than required this year, when it repeatedly pumped above its production target before scrapping the limit altogether earlier this month.
Needless to say, OPEC forecasts are about as bad as those made by the Federal Reserve, and even so over the long run OPEC assumes that prices will rise to average $80 a barrel in nominal terms in 2020, and $70.70 in real terms. As Bloomberg reminds us, last year it had anticipated nominal prices of $110 and real levels of $95.40. That means the value of the group’s output in 2020 would be $218 billion less than estimated a year ago, when it first embarked on the policy to protect market share. That is nearly a quarter trillion gap which oil exporting countries, whose budgets are heavily reliant on oil production and prices, have to fill by other means such as selling reserves which they have been doing as part of the demise of the Petrodollar, something we previewed over a year ago.
The optimism in the latest OPEC report comes on the demand side, as the organization increases its estimate for global oil demand in 2020 by 500,000 barrels a day to 97.4 million a day. By then, fuel consumption in emerging nations will overtake that in the industrialized economies of the Organization for Economic Cooperation and Development, it said.
OPEC is also hopeful that the shale revolution will finally end, and that non-OPEC supply in 2020 will fall by 1 million barrels a day to 60.2 million a day as “market instability” leads to reductions in spending and drilling. Still, non-OPEC supply will still grow by 2.8 million barrels a day this decade, including 800,000 barrels of additional U.S. shale oil. OPEC said the outlook, which incorporated some data set in the middle of the year, was “clouded by uncertainties.”
And while OPEC, tired of being very wrong in its near-term forecasts laid out forecasts going through 2040 which have absolutely zero chance of being even remotely accurate, it is notable that according to Bloomberg almost $10 trillion will need to be invested in the oil industry through to 2040 to develop the required supplies, with $7.2 trillion of this in exploration and production. Producers outside OPEC will need to do the bulk of the spending, investing $250 billion a year. Where this CapEx will come from in an age when producers are slashing exploration and production outlays is not exactly clear.
* * *
Perhaps it is as a result of "cloudied uncertainty" and ongoing race to the bottom by all oil producers, OPEC and non-OPEC alike, that someone is betting that OPEC will be woefully wrong in its price forecasts, and is buying puts that see oil plunging as low as $15 a barrel next year, the latest sign some investors expect an even deeper slump in energy prices. 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.
This ties in with the recent forecast by Goldman Sachs which has said $20 oil is not impossible: "We view the oversupply as continuing well into next year," Jeffrey Currie, head of commodities research at Goldman Sachs Group Inc., wrote in a note on Tuesday, adding there’s a risk oil prices would fall to $20 a barrel to force production shutdowns if mild weather continues to damp demand.
As the chart below shows, the bearish outlook on oil prices has prompted investors to buy put options at strike prices of $30, $25, $20 and even $15 a barrel, according to data from the New York Mercantile Exchange and the U.S. Depository Trust & Clearing Corp. With WTI currently trading at about $36 a barrel, this means someone is wagering on a drop which could be greater than 50% in the coming months.
As Bloomberg points out, investors 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 largest open interest across options contracts - both bullish and bearish - for December 2016 is for puts at $30 a barrel.
The number of outstanding contracts below $30 a barrel is relatively small. But the open interest for June 2016 put options at $25 a barrel has nearly doubled over the last week. Investors have even bought put options that will pay if WTI drops below $15 a barrel by December next year. The volume of financial bets at that level is tiny - 640,000 barrels in total.
While the position may be simply a hedge instead of a direction bet, it reveals that the prevailing mood is hardly one of OPEC-ian exuberance. “Overall it’s still very bearish,” Gareth Lewis-Davies, a London-based energy strategist at BNP Paribas SA, said.
Of course, for every put buyer there is a put seller: it remains to be seen who will end up right, although as Victor Shum, a vice president IHS Inc., says in Bloomberg Television interview said "with WTI now pretty much at parity with Brent and Brent being the global oil benchmark, that really indicates a massive oversupply situation in the world."
Finally, since oil has become a key coincident signal for the entire market, should oil indeed plunge another 50% from here, all those bullish "strategist" forecasts for a low double digit in the S&P will promptly have to be scrubbed, again, should the black gold resume its downward trajectory from this latest dead cat bounce.
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Today's Balls of Steel award goes to the Hezbollah pickup driver in Syria who was targetted by an ISIS ATGM. He drives his pickup out of the way at the last second giving the ATGM controller no time to react. The ATGM hits a building that was behind the pickup before it moved.
https://www.youtube.com/watch?v=GAAo1ec06Wg
Shortin crude over here boss.
Yet Another Way Excessive Debt Hinders Capitalism and price discovery (Oil Edition)
We will be at war (not just a proxy war) before oil falls to $15
Excuse me......we are at war.
So is damn near everyone else....we thank the Russians for handling ISIS for us.....Paul Ryan just spent us into oblivion.
I could handle that....but Nancy Peloisi gloating about it....just chaps my ass.
Find out what ISIS was selling crude for...there's your price floor!! Do I have to explain everything to you guys?! :D
Was his mother in law living in the building behind his pick up?
Just curious.
Coffee spitter!!!! Score that one less secret santa obligation.
I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... www.wallstreet34.com
I know the cash is good, but really you should have more self respect. Pay per second online peep shows of you involving a pineapple, three trannies, and the pen you insert in your urethra really is degenerate.
Study to be an electrician and you can make more anyway.
I will wait until they pay you to take oil off their hands.
World oil production is 94 million barrels a day with USA and China importing around 7.5 million barrels a day each and India importing 3.8 million barrels a day.
Oil prices are more likley to rise than fall from here.
You know the bottom is in when shitheads start talking oil at $15. Same as dow 36000
Agree. Also, who's to say that the option activity isn't coming from producers hedging into the new normal.
Or maaaayyybe....
It's a trap!
That's $0.27/gallon of crude.
It only costs $5 to drill it out of the ground. OH WAIT!
I think that's bitcoins actually.
Just as well you can't eat it.
Deafening silence from the peak oil drama queens
What part of demand destruction do you not fathom? Google historic gas prices. Look at the ten year chart. Notice that prices collapse in tandem with economic collapse. Then look at the North Sea production charts. Then look at Alaskan production. Notice a trend? Production is declining. High oil prices brought a lot of marginal oil on line. That marginal oil hit the market as the market stalled. What is going in is that producers are producing like crazy to maintain cash flow in declining markets. Over production in a collapsing economy is producing a surplus. It is a simple as that.
+1. Indeed, indeed (you beat me to it). Something ugly cometh this way...
Great analysis, Cloud9.5! It really is as simple as that...all the complication arises out of the dealing. Trying to buy a quantity they can't afford and sell it on before they have to actually pay for it.
Oil has got to be one of the most "supply & demand" rackets there is!
I said this "smart assed" a few frames back but now I'm serious. ISIS has set the floor for the oil price. How much would a crooked President pay terrorist organization for stolen crude? What are the costs of this terrorist organization to deliver the crude...trucks, men, diesel...bullets, RPG's...video production team to taunt the Americans...
What did ISIS sell a barrel of crude to Bilal Erdogan for?
Yep. But what is the expected extent and duration of the demand destruction? Likely it's a very transient flattening rather than a permanent structural global decline. In any case right now something on the order of 35-40% of the world's production is above break even at market prices (most of that in OPEC nations all of whose budgets require a multiple of present prices to stave off the crowds wielding torches and pitchforks). There's no chance of sustained demand destruction sufficient to offset even the natural 5% annual decline from existing wells much less the ocean of presently unprofitable oil. In short: demand destruction cannot support present prices, not even close.
Take a look at rig counts & production in Middle Eastern OPEC nations, they've exploded over the past few years and haven't tailed off at all. That's not an accident it's an intentional oversupply being force-fed to the market with the explicit intent of driving marginal producers out and instilling enough fear in their financiers that they won't come back as soon as the market turns. But we know that the best funded among the OPEC crowd, the Saudis, will run out of money in a little over three years at present prices. We also know that spare capacity in all of OPEC might be sufficient to offset as much as a year's worth of natural decline globally (a far cry from the 80s when the Saudis were sitting on enough spare capacity to cover roughly two decades worth of global demand increases).
The punch line is that OPEC is having to work awfully hard to give the impression that the world is drowning in oil, even in a period of moderate economic distress & flattening demand. Things that can't go on forever ....
Peak cheap oil IS here, IMHO. Most producers operate at a loss currently, at least in the US, and the Saudis are hurting real good too. Yes, there is oil out there, but if it weren't for the cheap credit only a fraction of that oil would be produced (under *normal* market conditions). So if you include the credit as COSTS to produce (which one should, but they obviously don't) then the situation is very dire. The coming credit bust in the oil industry may cause liquidations and even lower prices in the short term, not because it is cheap to produce, but because it is too cheap (epic misallocation of capital). The coming oil credit bust could well prove to be one for the history books. As long as *they* can paper things over (and they are hard at work in order to do so), oil prices will not reflect this underlying ugly truth. So happy trading in these "fair and transparent" markets. After all, it oil is also nicknamed black gold for good reason...
But the word "cheap" becomes meaningless in a NIRP environment...
You go too NIRP and bad things WILL happen... but for the time being it is papered over and the low prices will likely continue for a bit longer. But that will not work ad infinitum going forward. The West is literally living on borrowed time. Good luck to all.
What kind of putz buys puts at this level?
how much is hedging a long position?
Who says Deflation is not going to happen ?
When oil hits $15 a barrel I foresee everyone converting their swimming pools to fuel tanks.
Frankly speaking it's total BS when the cost of fuel is cheaper than soft drink.
Now all I want for Christmas is for them to drive gold down to $500 and silver down to $7 so I can do my Christmas shopping in advance for the next 10 years.
Trouble in the ME - one wrong step and oil could do the opposite.
Yeah.....could.
Probably not today though.
in the current roller coaster economy it could be 100 one day and 10 the next !
Gotta hedge if socialism goes full retard. Peak Oil, supply side baby.
We're at Peak Earth.....we have 500 days.
After that.....we'll give you another 500 days.
Got to love these conflicting reports. One says shortage, then a report follows saying an excess.
In the meantime you have loads of tankers filled with oil waiting it out,
Filling up everything they can with cheaper oil.
Well if it was easy....everyone would be doing it.
Just be glad you got a job.
I <3 cheap gas.
"Finally, since oil has become a key coincident signal for the entire market..."
like I said, when's that other shoe going to drop... looks like shortly after the new year at this rate...
too many oil barrels chasing too few dollars is always a strong recession indicator... if you're not burning the bubblin' crude as fast as it's coming out of the ground, you're not growing... q.e.d.
headline: "Someone Bets Big on $15 Crude ..."
story: "The volume of financial bets at that level is tiny - 640,000 barrels in total."
ummmmm ...
GARTMAN!!!
I am a guy who likes to belive that there is finite amount of natural resources. With that view I thought oil bottomed exactly last year around this time. I got burnt. I am not trading oil any time soon. No one knows the truth. This is all sound. Nothing serious. The answer I would like to know what would the government of US would like the oil to be? US is producing oil alot. How beneficial would it be to see oil at 35/barrel. I don't know. There are way too many global forces including nations, corporations involved in this.This has been the toughest trade for me.
Sounds like Goldman is looking to scoop up some Sweet Crude and wants to chew down that price a few more shekels.
Ten years ago I said (with regards to peak oil and running out altogether):
"The last vehicle moving on earth will be a US Aircraft Carrier, the Captain of which would arrive at the dock chauffeured in the last Cadillac Escalade moving in the country. This is because the Americans will use up the entire world's oil reserves before they tap their own supply in earnest.
Now:
The United States has tapped their own supply in earnest. So, what does that mean? Has the rest of the world run out of oil first? No. SO...it must mean that we are at peak oil. Because, if we are running out of oil, Obama is the most reckless son of a whore God ever let in the door.
But about that...Obama's "Energy Independence Program", wanting to stop imports and become a net exporter of oil...how does this help the USA? Joining the world in using up a finite resource along side of everyone else so we can do what in the end? Have one last major war over the last barrel of oil?
I submit that we are nowhere near peak oil...I now think it's the other way...there is no end to oil. There is as much as we want if we just go deep enough. I think Russia has figured this out. I think Saudi Arabia is lucky, their endless supply is at 500 metres below the surface. I think every country that won't keep this a secret and wants to ruin the USA's oil hegemony gets blown to shit!
What else explains Obama just throwing the USA's oil reserves up on the table to be used up like the rest of the world?
Houston, YOU got a problem...
ten