Options Traders Bet February Oil Will Fall Below $25 a Barrel

By Robert Tuttle

Nov. 26 (Bloomberg) -- Oil traders placed bets that crude oil for February delivery will collapse to below $25 a barrel as economies around the world slide more deeply into recession, cutting energy demand.

February $25 puts, the seventh-most actively traded option, rose 8 cents to 10 cents a barrel, or $100 a contract, at 4:19 p.m. on the New York Mercantile Exchange. A total of 184 lots traded, up from none yesterday. Earlier in the day, it was the most actively traded option. The puts fell 1 cent to 1 cent at 5:14 p.m.

“It’s a lottery ticket,” said James Cordier, portfolio manager at OptionSellers.com in Tampa, Florida. “It’s somebody making a bet that crude oil is going to crash in the next six weeks.”

Crude oil futures have dropped 53 percent in the past three months, dropping below $50 a barrel last week, as a credit squeeze pushed economies into recession and reduced demand for petroleum products. Orders for U.S. durable goods fell twice as much as forecast in October, the Commerce Department said today.

The Organization of Petroleum Exporting Countries, producers of more than 40 percent of world oil, will reduce output before the end of the year to stem the decline in price, according to 18 of 21 analysts surveyed by Bloomberg. The group is scheduled to meet in Cairo on Nov. 29 and in Algeria on Dec. 17.

“If OPEC doesn’t get ahead of the curve, those $25 puts are going to start to look interesting,” said Dominick Chirichella, a senior partner at the Energy Management Institute in New York.

Saudi Production

Saudi Arabia, OPEC’s largest producer, may be under pressure to maintain output levels so as not to harm the world economy, Chirichella said.

Crude oil for January delivery gained $3.67, or 7.2 percent, to settle at $54.44 a barrel on the exchange. Futures gained after China, the world’s second-biggest energy consumer, reduced interest rates the most in 11 years to raise economic growth. Stocks in the U.S., Europe and Asia rose the first three days of this week.

“With stock markets around the world stabilizing, the idea that crude oil could end its bear market is very much possible,” Cordier said.

March $60 puts, the most actively traded contract, fell $2.25 to $8.76 a barrel, or $8,760 a contract. A total of 400 lots traded, up from zero yesterday.

January $56 calls, the second most actively traded contract, gained $1.23 to $3.41 a barrel, or $3,410 a contract, on 380 lots traded. January $45 puts, the third-most actively traded option, fell 89 cents to 86 cents a barrel, or $860 a contract, on 351 lots traded.

One options contract equals 1,000 barrels of oil.

To contact the reporter on this story: Robert Tuttle in New York at rtuttle@bloomberg.net