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Hedge Funds Betting On $100 Oil

Oil Rig

Options traders expect oil prices to rise above $80 per barrel and reach close to $110 per barrel within the next four years, according to data from the New York Mercantile Exchange and the U.S. Depository Trust & Clearing Corp, reports Bloomberg.

It’s important to take note of these large option trades, probably initiated by the hedge funds, who are betting millions that oil prices will rise. The trades are spread over a period of three years, starting from late 2018 to 2020.

Similarly, a few large traders, such as Pierre Andurand, the founder of the $1.2 billion Andurand Capital Management and hedge-fund manager Doug King, the London-based chief investment officer and co-owner of RCMA Asset Management had predicted large downsides in oil and earned handsome returns for their funds in 2014 and 2015.

When oil was trading at $48/b in August 2015, many traders bought put options, betting big that oil would fall below $30/b. They were amply rewarded when crude slid below $30/b.

However, for the past few months, oil has been on a tear, recovering more than 80 percent from its lows. Though the current rally is stalling close to the $50/b mark, which is also a strong technical resistance, the huge amount of call buying at higher levels forecasts a bright future for oil.

"We are in a world where we see very low prices followed by very high prices," Mr. Andurand said in the interview to Bloomberg back in January of this year. "I actually think it has bottomed." He predicted oil prices to rise to $50/b in 2016 and to reach $70/b in 2017, in the same interview.

A few trades that catch the eye are: a purchase of 4 million barrels of call options at $80 and $110/b strike price with expiry in 2019 and 2020. Another significant transaction of 800,000 barrels was done at the strike price of $60/b, reports Bloomberg. Related: Can Trump Change The Direction Of U.S. Energy?

Wood Mackenzie reported in January of this year that $380 billion worth of investments into oil have been cancelled since 2014, which will lead to an acute shortage of oil supply in the future. Hence, it is important to take note of the changing fundamentals.

"The market faces a supply crunch in the next 24 months," said Francisco Blanch, head of commodities research at Bank of America Merrill Lynch in New York. "Some hedge funds are betting that oil prices will need to rise sharply to bring demand down again -- that’s why they are buying deep out-of-the-money call options," reports Bloomberg.

It is difficult for small traders to take large positions based on this data alone, because, in the short-term, various factors affect oil prices. Nonetheless, it provides a bullish outlook for oil in the future, contrary to many reports earlier, where the experts believed that oil may not touch $100/b levels ever again.

The bottom in oil is firmly in place, and the traders can look to buy on any significant dips in oil due to supply restorations in Canada, Libya, Nigeria and on increased pumping by the shale oil drillers.

By Rakesh Upadhyay for Oilprice.com

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Leave a comment
  • Don't wanna say it on June 15 2016 said:
    I bet the oil prices will settle close to 80$ by the end of December 2016.
  • adec on June 16 2016 said:
    the same author predicted that oil price will dip back into 30s not long ago. Go figure!
  • Bill Simpson on June 17 2016 said:
    Cutting back on exploration has to eventually result in less oil being produced. And exploration budgets have been substantially reduced. Demand will continue to increase, possibly not matching the historical average, due to the electric car, but it will increase. The vast number of people in less developed countries can't afford electric cars. Gas ones, they can afford.
    The only uncertainty is when the price of oil will begin to rise. It is impossible to get that right because nobody knows how much oil Iraq, Iran, Russia, Libya, Venezuela, and Nigeria will export during the next few years.
    Regardless, oil will unleash the next economic black swan, which will be the size of a T-Rex. Either the low oil price will cause too little exploration, which will cause an energy shortage that forces the economy to contract, leading to a depression from the popping of the debt bubble, or high oil prices will act like a giant tax increase, destroying demand which will shrink the economy, and lead to the same result.
    If it wasn't for the lengthily time lag needed to locate and get additional oil to market, it might be possible to adjust supply to demand, based on price signals. But that will be impossible to do in time to prevent a global economic collapse. There is too big a time lag, and too much debt to be serviced every month.
    So expect a major economic collapse on the scale of the Great Depression, probably before 2023. Oil will be way above $100 a barrel by then, unless China has another revolution first.
    Oil isn't just another commodity. It is a critical input allowing the economy to function. Either a shortage, or very high prices, will pop the debt bubble which has been steadily growing since the late 1970's. It is too late to prevent it now.
    Interest rates aren't negative on over $10 trillion of bonds for nothing. That is a sign that something is very wrong with the globalized economy. Google search the three, 'Negative Thinking' articles in MarketWatch by Satyajit Das, if you think I'm wrong. Check out the books Das has written. He is a brilliant fellow. You may find his last couple of paragraphs in his third MarketWatch article a bit scary.

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