By Mark Shenk and Margot Habiby
April 19 (Bloomberg) -- OPEC violating production quotas at the same time as demand from industrialized nations stagnates is spurring bets in the oil market that the 13-month rally in crude is coming to an end.
Options that profit if prices fall in the next month are 26 percent higher than wagers oil will rise. Open interest in June $50 and $60 puts to sell at those levels exceeded 129,000 contracts on April 16, dwarfing the 50,000 bets on $100 a barrel. Puts account for about 56 percent of all June options contracts compared with 51 percent a year earlier.
The Organization of Petroleum Exporting Countries may be creating a glut after output jumped 5.6 percent to 29.2 million barrels a day in March from a year earlier, according to Bloomberg estimates. Shipments will rise 0.9 percent in the four weeks ending May 1, according to tanker-tracker Oil Movements.
“Oil at $87 a barrel seems pretty unreasonable given the fundamentals of the market,” said Addison Armstrong, director of market research at Tradition Energy, a Stamford, Connecticut- based procurement adviser. “Forget China and India for a minute. The U.S. remains the biggest consumer, and U.S. demand hasn’t recovered.”
Crude reached $87.09 a barrel on April 6 on the New York Mercantile Exchange, the highest intraday level since Oct. 9, 2008, on signs that economic growth in the U.S. will accelerate. Futures are down 45 percent from an all-time high of $147.27 reached on July 11, 2008. Crude for May delivery dropped $1.79, or 2.2 percent, to $81.45 a barrel in New York, a third consecutive decline.
Bubble
“It’s a bubble and we don’t know when it’s going to go bust, but it’s just a question of time,” said Eugen Weinberg, a senior analyst with Commerzbank AG in Frankfurt. “So enjoy the party but stay close to the door.”
U.S. demand will drop 9.4 percent to average 18.84 million barrels a day this year, from a record 20.8 million in 2005, the Energy Department said on April 6. The U.S. uses more than twice as much crude as China, the second-biggest consumer. India is fourth.
Consumption in the 30 industrialized countries that belong to the Organization for Economic Cooperation and Development will average 45.4 million barrels a day this year, down 8.3 percent from 2006, according to the International Energy Agency, which coordinates energy policy of 28 developed nations.
“Slower rates of economic growth and tighter environmental regulations mean that OECD demand has peaked, particularly in Europe and Asia,” said Rick Mueller, director of oil markets at Energy Security Analysis Inc. in Wakefield, Massachusetts. “Given the fundamentals, it’s hard to see triple-digit prices.”
Economic Expansion
Oil and equities surged to 18-month highs this month on reports that the global economy is rebounding. The International Monetary Fund forecasts developing economies will expand 6 percent this year and advanced nations 2.1 percent. The U.S. is forecast to grow 3 percent this year and next, according to the median of 53 responses in a Bloomberg survey.
“As the economy picks up, we’ll see demand for gasoline and distillate fuels pick up,” said Carl Larry, president of Oil Outlooks & Opinions LLC in Houston. “The rally that occurred in 2007 and 2008 is on everyone’s mind and nobody wants to miss the boat this time.”
Gasoline use rose 1.3 percent in the four weeks ended April 9, the most since August 2004, Energy Department figures show. Total fuel demand increased 3.9 percent to 21.3 million barrels a day in March, according to the American Petroleum Institute.
Non-OECD Demand
Consumption by non-OECD countries such as China, India and Brazil will rise 1.43 million barrels to 40.09 million a day this year, the April 6 Energy Department report showed. The forecast is up 60,000 barrels from a month earlier. Demand in emerging economies will climb 1.39 million barrels to 41.48 million in 2011, the report showed.
“We’re heading for $100,” said John Kilduff, a partner at Round Earth Capital, a New York-based hedge fund that focuses on food and energy. “The economic recovery is for real and as demand picks up we will find that there’s a restrained supply regime. The industry is going to be caught flat-footed again as demand increases.”
The IEA, OPEC and Energy Department agree that any demand growth will come from emerging economies. China expanded at an 11.9 percent rate in the first quarter, according to the country’s statistics bureau.
Yet, the combination of rising production and sluggish demand has sent stockpiles soaring and left some countries and companies storing oil in tankers. U.S. supplies of crude rose in 10 of the past 11 weeks, according to Energy Department reports, leaving inventories 5.1 percent higher than the five-year average for the period.
Full Tankers
Iran, OPEC’s second-biggest producer, may be storing as much as 30 million barrels on tankers, ICAP Shipping said in an April 16 report.
OPEC, in its monthly report on April 14, said it will need to pump less than previously estimated this year. At the same time, compliance with quotas among group members fell to 53 percent in March, led by additional output from Venezuela, Nigeria and Saudi Arabia, the data show.
Global output will climb 1.8 percent to 85.66 million barrels a day this year, according to the Energy Department. The gain will come from both OPEC members and producers such as the U.S., Russia and Brazil. Demand will increase 1.7 percent to 85.5 million, leaving 160,000 barrels a day of excess output.
Outside OPEC
Non-OPEC producers account for more than 60 percent of supplies. They will raise production by 600,000 barrels a day this year to 52 million barrels a day, the IEA said in its monthly market report April 13. That’s 220,000 barrels a day higher than estimated in March.
The U.S. pumped 5.53 million barrels a day in March, the most since May 2005, according to the American Petroleum Institute. The U.S. is the world’s third-biggest producer after Russia and Saudi Arabia.
“Production here should continue to rise,” said John Felmy, chief economist with the Washington-based API. “There are a bunch of projects being developed.”
The number of oil rigs operating in the U.S. rose by one to 506 in the week ended April 16, the highest level since March 1991, according to data published by Baker Hughes Inc.
New production fields are coming online because of investment decisions made when oil climbed to the record in 2008 before plunging 78 percent to a low of $32.40 five months later.
Rising prices in the 1970s spurred the development of new production in Alaska and the North Sea, which helped depress the market in the 1980s and 1990s.
“Futures tend to rise by the stairs and drop in an elevator,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “We saw a steady rise to a record high in 2008 and then gave it all up, and then some, in five months.”
--With assistance from Grant Smith in London. Editors: Joe Link, Dan Stets
To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net; Margot Habiby in Dallas at mhabiby@bloomberg.net.
To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net
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