Speculation over oil prices

Andrew Clark

Think oil at $100 a barrel seems expensive? Speculators are already betting that the price will double to $200 a barrel by year-end. On the floor of the New York Mercantile Exchange (Nymex), the number of options to buy oil at $200 has leapt 10-fold in the past two months to 5,533 contracts.

The increase in demand is a record for any similar period.

The price for the contracts has jumped 36 per cent since early December.

Options contracts are a simple way for investors to speculate on rising prices. Buyers do not have to keep them until the price hits $200 — they can simply sell them on as their value rises.

The number of $200 contracts is still extremely small in the context of the overall options market — and Kevin Norrish, director of commodity research at Barclays Capital, suggested that it would take a “massive supply shock,” such as another war in the Middle East, for the price to double this year.

“It’s not outside the bounds of possibility — but it’s a very extreme possibility,” Mr. Norrish said. “You would have to see a very large proportion of supply taken out of the market for that to happen.”

Barclays Capital predicts an average oil price of $87.40 for 2008. It expects the market to remain tight, with demand strong in America and Asia and weak supplies from non-OPEC countries. — ©Guardian Newspapers Limited, 2008