Investors shift bets to oil slide

Investors shift bets to oil slide

By Javier Blas in London

Published: January 27 2008 23:19 | Last updated: January 27 2008 23:19

Investors are shifting their bets towards oil prices weakening in the near future as the slowdown in US economic activity damps energy demand growth, traders in London and New York said.

The recent changes in trading positions could signal that oil prices have peaked after hitting a high of $100.09 a barrel early this month. Last week, oil dropped to a three-month low of $85.42 a barrel although it recovered to trade above $90 a barrel by Friday.

The shift in sentiment is, however, subtle and investors continue to anticipate that prices in 2008 will be higher on average than last year. But it could cause concern among Opec ministers, who will meet in Vienna later this week.

The reversal in investor mood is reflected in the buying of options contracts that will be only profitable if prices fall by mid-year below $80 a barrel. Crude oil has been trading in a range of $80-$100 a barrel since mid-October.

The outstanding number of put options for June 2008 -- contracts that give the right to sell at a pre-determined price -- at $80 a barrel have jumped by a factor of four in the past two and half months to more than 47,000 contracts.

Nauman Barakat, of Macquarie in New York, said that last week investors had bought large volumes of put options, particularly for the second half of the year. “Hedge funds are losing heart on the bullishness of the oil market,” Mr Barakat said.

Also, investors are beginning to unwind some of the positions they built as bets that oil prices will this year trade above $100 -- and even as high as $200 a barrel.

The outstanding number of call options contracts that give the right to buy at $100 a barrel in June 2008 has declined by 25 per cent since last November.