*Renowned oil trader Pierre Andurand drew attention in late January for his bullish position on a market reeling from the prolonged decline in petroleum prices. Andurand, who has worked for Goldman Sachs and now runs his own hedge fund, had said since summer that prices could fall below $30 a barrel. He now sees them bottoming out soon and predicts a recovery to $50 by year-end.
*The International Energy Agency said in its February report that downturn risks for crudeprices have grown. And no end seems in sight to the glut, with OPEC members maintaining high output in January.
*”There’s a high chance WTI could push $20 if the market starts to feel the slowing demand,” said Takayuki Nogami of the Japan Oil, Gas and Metals National Corp. Manufacturers and some investment funds are snapping up put options, the right to sell oil in the future at a predetermined price, in anticipation of a drop past the $20 mark.
*But Andurand is not alone in shifting gears. Speculators are building up oil futures. Orders for call options, the right to buy in the future at a predetermined price, have surged as well. Open interest in $45 puts for March futures has increased 50% since the end of January to 34,000 contracts. Investment funds and oil consumers are preparing for a possible petroleum rebound.
*Many think that output will stop growing as prices languish. Most oilproducing countries will face losses in cash terms should prices fall into the $20 range.
*”Prices will only fall below $30 for a month or two, considering oil producers will bleed out cash if they continue operating under those circumstances,” said Takashi Hayashida of Elements Capital.
*Large demonstrations erupted in Azerbaijan this January as a weak currency pushed up food prices. Others, including Venezuela and Nigeria, are also in tough spots. With government-backed companies responsible for oil production in many of these nations, financial difficulties can directly impact output.
*”The budgets of oil companies and oil-producing countries in the Middle East will not be able to bear the current prices,” said Keigo Matsubara, chief financial officer at Japanese trading house Mitsui & Co.
*Even U.S. shale, which had been resilient so far, is feeling the heat. American crude oil output will fall 8% to a daily 8.69 million barrels this year, according to the Department of Energy. Financial institutions are growing hesitant to make shale-related investments.
*Futures near delivery may plunge on speculation, but ones with far-off delivery dates have only seen a small dip. While oil prices could fall further in the short term, signs of a rebound have started emerging. → Neal Bhai Reports