Options show positioning for oil well below $100 by year-end

Bloomberg Market Specialists Lucita Ng and Tania Florencia Wiranata contributed to this article. The original version appeared first on the Bloomberg Terminal.

Background

West Texas Intermediate futures declined in early August to their lowest price since before Russia’s invasion of Ukraine in February after a U.S. inventory report indicating slowing demand and OPEC’s agreement to increase production. Crude has essentially given up all gains brought on by the invasion. WTI futures declined below $90 a barrel before rallying slightly on Aug. 7.

Some options traders are expecting Brent crude prices to fall under $100 a barrel in 2023. And while Goldman Sachs Group Inc. and Bank of America Corp. have predicted futures near $140, Goldman Sachs has lowered its current-quarter forecast to $110.

The issue

Industry experts, including veteran analyst Paul Sankey, see a case for Brent crude prices falling below $100 a barrel. “It’s easy to argue for $100 oil on an ongoing basis starting in 2023,” Sankey explained his doubt that prices will exceed $150 due to “demand elasticity [and] the effect of the strong dollar.” Sankey also notes that the continued U.S. release of oil from its Strategic Petroleum Reserve is holding down oil prices.

To be sure, some traders are placing wagers on oil to hit $200 for September. Bloomberg Intelligence says there is one scenario in which the EU’s Russian oil ban, China’s reopening, low inventories and limited spare capacity can push prices to that level “before demand destruction ultimately kicks in to rebalance the market.”

Contracts with the largest open interest for December 2022 are Brent puts with strike prices of $55, well below the current spot price of around $96. Put strikes are more concentrated at lower levels in contrast with scattered call strikes. A surge in Chinese and Indian imports of Russian barrels, inspired by a record Urals-Brent discount, could be a safety valve to slow price rallies.

Tracking

Use Bloomberg’s API, CPFC, newly introduced DSET and BI tools to analyze the crude market. Expert analysis from Bloomberg Intelligence coupled with granular datasets (DSET) and analyts’ forecast (CPFC) to spot trends enables users to track price movements and crude flows. Leverage BQL (Bloomberg Query Language) to build queries that filter and aggregate time series option data and enhance your analysis with interactive visuals and powerful Python libraries on Bloomberg’s Quant Tool (Bquant).

Forward curves (green) and forecasts (blue) are pointing to lower oil in the coming two years. Across the board, the downward trend suggests the rally will fade by the end of the year, with both WTI and Brent median forecasts at sub-$100 levels.

To be sure, some traders are placing wagers on oil to hit $200 for September. BI says there is one scenario in which the EU’s Russian oil ban, China’s reopening, low inventories and limited spare capacity can push prices to that level, “before demand destruction ultimately kicks in to rebalance the market.”

The record Urals to Brent discount offers incentives for Chinese and Indian buyers to continue purchases, despite the EU’s ban on seaborne imports of Russian petroleum.

China and India have snapped up Russian oil more aggressively since late March after Russia’s invasion of Ukraine. India’s state-owned refiners are also showing interest in supplies from Rosneft PJSC.

In June, Russian oil traded at a discount of $32.7 a barrel to Brent. This compared with much narrower WTI-Brent (white) and OPEC-Brent (orange) differentials, increasing the appeal of Russian supplies for China and India.