London: Oil traders are paying more than ever in the options market to protect against a plunge in crude prices.
The gap between prices of options betting on a decline and those that would profit from a rise in oil widened to a record 10 percentage points, according to five years of data compiled by Bank of America Securities Merrill Lynch.
Crude stockpiles in the US are 14% larger than a year ago and the Organization of the Petroleum Exporting Countries is pumping 600,000 barrels a day more than the world needs, according to the International Energy Agency (IEA).
While the recovery from the first global recession since World War II pushed oil up 62% this year to $72.04 a barrel in New York, growth alone isn’t likely to erode the glut by the end of next year because production exceeds demand, data from the Paris-based IEA shows. A drop in prices would penalize companies from Exxon Mobil Corp. to BP Plc and exporters Russia and Saudi Arabia.
“If ever there was going to be a retreat below $60 a barrel, it is now,” Stephen Schork, president of consultant Schork Group Inc. in Villanova, Pennsylvania, said in a telephone interview. “It was a very weak summer. We came out with more gasoline than we started.” Options granting the right to sell, or put, oil in December below current prices have a so-called implied volatility of 54.3%, compared with 43.3% for the equivalent options to buy, or call, data from the New York Mercantile Exchange show.
The premium for December and other put options shows the market is worried, said Harry Tchilinguirian, a senior oil analyst at BNP Paribas SA in London. “If puts are pricing higher than calls, we are looking at a situation where the market is more averse to the downside and is looking for more compensation for the option,” he said. Demand for puts may be caused by speculators betting on lower prices or by producers hedging against a decline in the value of their oil, Tchilinguirian said.
Oil inventories totalled about 2.8 billion barrels at the July-end within the 30 nations of the Organization for Economic Cooperation and Development, according to IEA.
The total is equal to 62 days of demand, and 4.6% more than the same time last year.
Supplies are brimming on both sides of the Atlantic. US distillate fuel inventories, which include heating oil and jet fuel, are the highest since 1983 at 167.8 million barrels, according to the Energy Department. US gasoline supplies are 2.2% more than they were in late May, the start of the peak-demand summer driving season, at 207.7 million barrels. Gasoil stockpiles, the European equivalent of heating oil, near Europe’s refining hub of Rotterdam reached a record 3.03 million tons (23 million barrels) on 10 September, according to PJK International BV of Oosterhout, the Netherlands.
At least 60 million barrels of fuel is stored on tankers offshore, according to IEA.