Will oil prices even further? That’s what some speculators are betting. The New York Mercantile Exchange, or NYMEX, reports that traders are buying up large numbers of $25 “put options” for February oil futures contracts. A put option gives a trader the right to sell oil at a future date for a given price—generally the price the trader thinks oil will fall below. As analyst James Cordier told Bloomsbury this week, the large volume of $25 options represents “somebody making a bet that crude oil is going to crash in the next six weeks.”
But is it a reasonable bet? Maybe. As bad economic news continues to mount, it’s more and more probable that economic growth—and thus, demand for oil—will stay stagnant or even fall for the next year. Merrill Lynch, for example, just cut its 2009 oil price forecast from $90 a barrel to just $50. If oil does indeed collapse to $25 (a price we haven't seen for 7 years or so), that could pull gasoline prices down to around $1.60 a gallon—and give recession weary consumers a much-needed break.
But low energy prices aren’t welcomed by all. Thus summer, many New Englanders signed contracts to buy heating oil this winter for $4 a gallon. That made sense when high prices seemed the new norm (in August, Goldman Sachs predicted $145-a-barrel oil by November 15)—but now seems foolish, given that heating oil is selling for around $2.75.
OPEC, too, doesn’t like bargain barrels. The cartel is considering cutting its production by as much as 1 million barrels a day to keep prices from falling below the level many cartel members need to balance their budgets.
But don’t get too used to cheap gasoline. The main driver for lower prices is the recession. When the economy eventually recovers, energy-hungry developing countries like China and India, responsible for more than half of recent growth in oil demand, will resume their high consumption. And as demand returns, so will higher oil prices. The Paris-based International Energy Agency predicts oil prices will average $110 in current dollars by 2030.
In fact, today’s low oil prices will likely bring back those higher prices even sooner. As oil gets cheaper and cheaper, oil companies can no longer afford as many new oil projects, especially in hard to reach fields, which means they won’t be bringing as much new oil to market over the next few years. Likewise, cheap oil removes the incentive to produce oil alternatives, like biofuels.
All of this retrenchment means total fuel supplies and production capacities will be falling just as the recession begins to lift and demand returns—a recipe for yet another spike.
So maybe you'd better take that Hummer back off the Christmas list.