Analysts Increase Probability on $80/Barrel Oil by Year End

4 July 2005

Bloomberg. Options contracts are pointing to oil at $80/barrel by the end of the year, and Deutsche Bank has increased its estimated probability that oil will top $75 a barrel to 21% up from 5% in January.

New York Mercantile Exchange data show 6,900 options contracts outstanding that allow buyers to purchase oil for December delivery at $80 a barrel, compared with an average of 77 contracts in January.

Oil has surged partly on concern that a dispute over Iran’s nuclear program to generate electricity may lead to conflict with the U.S. and disrupt supplies from the Middle East.

Oil prices in New York have soared 53% in the past year on concern producers and refiners will strain to meet demand for products ranging from gasoline to diesel and heating oil.

Sheikh Ahmad Zaki Yamani, who was the Saudi oil minister when Arab countries during the 1973 oil embargo, said that $100 a barrel oil “isn’t far-fetched.”

“We’ve certainly seen people asking for prices on $100” contracts, said Orrin Middleton, who markets options and other securities for Barclays Capital in London. “This was way off people’s radars 12 months ago. They now believe there’s a possibility, but it’s going to take a supply disruption to take us there.“

[...] “What they’re playing is the possibility of a supply interruption,” said Garrett Smith, who managed Boone Pickens’s BP Capital Energy Equity Fund until he left earlier this year to start his own hedge fund. “If you look at the history of supply disruptions, while they’re not predictable as to when they will occur, they are predictable in that they will occur.”

Following the US invasion of Iraq in March 2003, production plummeted from 2.48 million barrel a day the month before to 140,000 barrels per day in April. In May 2005, Iraqi production averaged 1.78 million barrels per day.

Iran is OPEC’s second-biggest producer behind Saudi Arabia, pumping some 3.9 million barrels per day.

“A surprise in the oil market would be if the U.S. attacks Iran,” Sheikh Zaki Yamani said at the [28 June] conference of the Centre for Global Energy Studies, which he founded and chairs. “Prices would shoot up, and then forget about $60'” a barrel, he said.

Increasing volatility in the oil markets is boosting trading in options. On June 13, a total of 2,602 options to buy crude for December delivery at $80 a barrel traded on Nymex.