Published October 29, 2008

Now, they're betting on oil hitting US$50

By RONNIE LIM
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(SINGAPORE) Over the last few weeks, more traders have reportedly been betting on options on the New York Mercantile Exchange (Nymex) to sell oil at US$50 a barrel by December. This is a complete U-turn from July - just four months back - when they were punting on options to buy the New York marker crude at above US$300 at the year-end.

And US$50 isn't that far-fetched, considering that crude oil fell to US$61.75 on Monday - almost 60 per cent off the peak of US$147.27 it touched on July 11.

Oil prices, in that respect, are clearly following the plunge in equity markets worldwide, as fears of a global recession arising from the financial crisis grow ever stronger.

Even a production cut of 1.5 million barrels per day starting November announced by the Organisation of Petroleum Exporting Countries last Friday failed to stem the bleeding.

Opec may follow last week's cut - its first in almost two years - with another if that fails to bolster prices, Iran's Opec representative, Mohammad Ali Khatibi, warned.

'There's basically oil demand erosion because of the slowdown in economies, so naturally oil prices are falling,' one trader with a national company said. 'And because oil prices rose so quickly, they're also overcorrecting on the way down.'

Another oil trader, contacted in Tokyo, said: 'Oil prices will continue to fall until they hit the floor.



'This is because the impact of the financial rescue package - whether in the US, Europe or Asia - hasn't filtered down yet. Credit is still not coming back, interest rates are still high and (investor) fear is still rampant.'

Asked what he thought the floor was, the trader said: 'US$50. I don't think it will break through that. It will be bad for the world. A more realistic price level will be somewhere between US$50 and US$70.'

The trader with the national company, however, said that, personally, he feels that oil could still fall through US$50. 'In this kind of market, there's a disconnect. Look at equities which are falling below their net asset values.'

Asked what the more immediate projection for November oil prices was, another oil broker said: 'People have essentially given up forecasting prices.

'Nobody expected oil prices to plunge US$40 in just the last one month,' he said, not counting the fall from US$147 to US$60 in the last three months.

Prices of oil products like petrol and diesel have, however, fallen less than crude oil, he said. 'International crude prices are usually the fastest moving, while prices of downstream, or end-user, oil products usually lag behind,' he said.

The lag is around a month, the trader said, given the fortnight it takes to ship crude oil to the refinery here, and another two weeks before the refined products reach the market.

Will we see oil prices rising again?

'Not unless the equities market also turns around,' he replied.