Oil options at $200/barrel rise 10-fold

The fastest-growing bet in the oil market these days is that the price of crude will double to $200 a barrel by year-end.

Options to buy oil for $200 on the New York Mercantile Exchange rose 10-fold in the past two months to 5,533 contracts, a record increase for any similar period.

The contracts, the cheapest way to speculate in energy markets, appreciated 36 per cent since early December as crude futures reached a record $100.09 on January 3.

While analysts at Merrill Lynch and UBS say the slowing US economy will lead to the biggest drop in prices since 2001, the options show some traders expect oil to rise for a seventh straight year.

Demand will increase 2.5 per cent in 2008, according to the International Energy Agency. US inventories fell to a three-year low on December 28. Production from Mexico is declining and Saudi Arabia is behind schedule in opening its newest field.

"One hundred dollars a barrel is actually 14.9 cents a cup, so we're still talking about oil being remarkably cheap," said Matthew Simmons, chairman of Simmons & Co International, a Houston-based investment bank that focuses on energy. Inventories``are tight as a drum and I don't see how we get out of this box. Demand clearly isn't starting to slow down."

World consumption will rise to 87.8 million barrels a day this year, 2.1 million more than in 2007, or about the same amount that Nigeria supplies, according to the Paris-based IEA, an adviser to oil-consuming nations.

Demand from China alone will increase 5.7 per cent to 8 million barrels a day as imports expand to support an economy that's likely to grow 11 per cent, the IEA said.

Oil suppliers are straining to increase production. Saudi Arabia, the world's largest exporter, said last week that the 500,000 barrel-a-day Khursaniyah oilfield missed a December start date.

Brazil's Tupi field, the second-largest find of the past two decades, lies more than eight kilometers (five miles) below the ocean surface and will take at least five years to develop.

Petroleos Mexicanos, Mexico's state oil monopoly, suffered a three-year, 40 per cent decline at its Cantarell field, the world's third-largest. Fighting in Nigeria reduced production 11 per cent since December 2005 to 2.18 million barrels a day, according to data compiled by Bloomberg.

Crude futures rose 2 per cent in the first three trading days of the new year, closing at $97.91 a barrel in New York on January 4. US crude inventories fell to a three-year low of 289.6 million barrels on December 28, according to an energy department report.

Oil for February delivery on Monday fell as much as 80 cents, or 0.8 per cent, to $97.11 a barrel in after-hours electronic trading on Nymex. It was at $97.42 at 3:08 pm Singapore time.

"We haven't got to $100 on just a whim," said Paul Horsnell, head of commodities research at Barclays Capital in London. "This is at heart also about longer-term concerns that supply capacity investment needs higher prices to keep up with demand growth.''

Barclays forecasts oil will average $87.40 a barrel this year, a 21 per cent increase from the 2007 average.

The Nymex options, which give speculators the right to buy 1,000 barrels of oil in December, are becoming a favorite for traders even if they don't expect crude to reach $200 because they are a cheaper way to speculate than using futures contracts. Options expire worthless if crude fails to reach the "strike'' price. There were 500 of the options on November 7.

The price of the options rose as high as $550 last week before closing at $300 on January 4. That amounts to 30 cents a barrel. The December futures to purchase 1,000 barrels in December rose 3.5 per cent to $94,010, or $94 a barrel.

"The most common analogy used to describe options is that it represents insurance'' against ``low probability'' events, said Tim Evans, an energy analyst at Citigroup Global Markets in New York. Oil forecasters say there's no chance of $200 crude, as the US, which consumes a quarter of the world's oil, slows.

Prices will average $78 a barrel this year, 20 per cent below the current level, and $75 in the fourth quarter, according to the median forecast of 27 analysts surveyed by Bloomberg. The last time prices fell that much was in 2001, when they dropped 26 per cent.