The IEA is expected to slash oil demand forecasts when it releases its World Energy Outlook later today. Bloomberg quotes a number of former IEA staff on the subject including Lawrence Eagles, now global head of commodities research at JPMorgan in New York, who suggests cuts could be as deep as 320,000 bpd.
With oil demand eroding so quickly, the question now is - just how low can crude prices actually go?
Some say $50 per barrel is a reasonable floor, based largely on the volume of outstanding put options around that mark expiring November 17th. But Stephen Schork, of the Schork Report, is less optimistic. While a China stimulus combined with Opec cuts will eventually install a floor in the market, he says that time is not now. In the meantime:
….there is no telling where that floor is. The same way no one had a clue how high prices could go last July, there is no telling how low we can go now. This market’s chattering classes have been telling us ever since crude oil retraced back to $110 that the floor was in. These were the same pundits that up until yesterday thought $60 would be the floor. So be careful, because now everyone is going to tell us that $50 is the floor… as if that number means anything.
The moral of the story, says Schork, is that while $50 could be the floor, it’s just as feasible crude could fall as far as $40 - there’s no point in even trying to predict where it can stop. Could Schork be admitting the market has abandoned all sense of supply/demand-related logic?
As far as options expiry goes, the clock is ticking, says Olivier Jakob of Petromatrix.
The expiry is set to be the largest option delivery ever on WTI, with about 24,000 puts each on $55 and $50. Jakob stresses, however, there is nothing below that mark. Meanwhile, the low ratio of option to futures open interest indicates that most of the options are unhedged, which could induce some wild swings into the expiry. Jakob writes:
As an example expiring at 70.5 $/bbl rather than 59.5 $/bbl would translate into 160′000 less short futures to be delivered compared to 97′000 more short Futures to be delivered if we close at 49.5 $/bbl rather than 60.5 $/bbl. Compared to the daily volatility there will be large swings to the deliverable quantities and a great game of spoof is in the making between the expiry of the Options and of the Futures, due to the size of new Futures positions that will get created through the Options and that will need to be closed in a short time frame to avoid the physical delivery process on the Futures contract.
Once WTI passes through that options obstacle, however, Jakob says the futures should be subject to less pressure.
