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US oil investors rush for protection at US$35 as Doha talks collapse
[NEW YORK] US crude oil investors piled on bearish option bets on Monday, fearing prices may retest 12-year lows as futures prices sank almost 7 per cent after talks by major exporters collapsed without agreement, erasing hopes the worldwide glut in oil would be eased.
Open interest in the June puts that allow the holder to sell at US$35 per barrel hit a record high above 36,000, up 8 per cent from Thursday and more than double levels seen in January.
Turnover in the contract, the most liquid on the massive US options market, was high, too, with more than 10,000 lots traded by early afternoon, equivalent of 10 million barrels of oil worth about US$370 million, as prices sank to as low as US$37.61 per barrel.
"Whether it's a speculator or a hedger looking to put a floor in place, the US$35 strike price makes sense," said John Saucer, vice president of research and analysis at Houston-based Mobius Risk Group. "Given the fact that prices fell as low as US$26.05, for people who think those lows might be retested, this gives them a little more wiggle room."
The meeting widely expected to result in a deal to freeze oil output by Opec and non-Opec producers fell apart on Sunday after Saudi Arabia demanded that Iran join in despite calls on Riyadh to save the agreement and help prop up crude prices.
While any agreement was not expected to accelerate the rebalancing of oil markets, analysts warned crude will remain under pressure as the possibility of coordinated action among Opec and non-Opec producers to rein in production has faded.
WTI could spiral toward as low as the US$30 range in the near term, they said. "The utter dysfunction within Opec that this failure confirmed is a clear negative, in our view," Macquarie analysts said in a note.
However, the pace of selling ebbed later as traders turned their attention to a strike in Kuwait, which has slashed output by more than half.
Volumes in the US$45 calls for June expiry breached 10,500 lots on Monday.
But prices will struggle to rally substantially while US stockpiles are at record highs.
"I think we're going to see continuous builds (in inventory) over the next few weeks, so I think it's going to be hard to get up to that US$45 level," said Tariq Zahir, oil trader and fund manager at Tyche Capital Advisors in Long Island, New York.