Oil dip
Crude oil prices have fallen to about $67 a barrel from their record summer highs of about $146, as concerns of slowing economies filter into the commodities market. But, even with that drop, the market is signalling further declines, according to analysts at Merrill Lynch.
ML analysts are looking at WTI crude oil options — where the number of implied vol for OTM puts is trading at much higher levels than for OTM calls. In other (English)words, more downside.
As of last close the options market is pricing in a probability of crude oil prices being in the $45 to $55 per barrel range by Dec. 16, 2008 that is seven times higher than the one based on past historical returns over a similar timeframe (see below) — that seems incredibly bearish given that Opec appears hellbent on cutting production this Friday.
Oil cartel divided over level of cuts
by Tracy Alloway
Opec is expected on Friday to decide to slash production as the oil cartel faces its biggest test in more than a decade. Newly released data reveal that the cartel’s vastly divergent economic circumstances will make the divided group’s decision of how much to cut even more difficult. Consultants PFC Energy calculated that Opec countries need next year’s oil prices to be anywhere from $10 to $100 to keep their import expenditures and export revenues in balance. Estimates by energy ministers of how much Opec will have to cut range from 500,000 barrels a day to 2.5m.
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