Traders Prepare for Next Oil Price Dip

Posted by Joseph Keefe November 19, 2015

March 2016 would mark start of low-demand spring season.

Oil traders are preparing for another downward turn in prices by March 2016, market data suggests, as what is expected to be an unusually warm winter dents demand just as Iran's resurgent crude exports hit global markets after sanctions are ended.

Crude futures have already lost around 60 percent of their value since mid-2014 as supply exceeds demand by roughly 0.7 million to 2.5 million barrels per day to create a glut that analysts say will last well into 2016.

Goldman Sachs said on Thursday that there was a substantial risk of a "sharp leg lower" in oil prices.

"Mild winter weather over the coming months could see weak heating demand in the U.S. and Europe," it said. This "would likely be the trigger for adjustments through the physical market, pushing oil prices down to cash costs, which we estimate are likely around $20 per barrel," the bank added.

A recent steep rise in March put option positions tied to a $35-per-barrel strike price in Brent and West Texas Intermediate (WTI) crude suggests traders agree with the bank and expect the major benchmarks to slump in coming months.

For WTI, put positions at the $30 strike price have more than doubled since Nov. 10, but have stayed flat at a more modest level for Brent.

This is in accord with a broadly held view that while oil prices in general will remain under pressure over the medium term, WTI prices may fall faster and further than Brent.

Goldman and other analysts say persistently high U.S. shale oil output that producers aren't allowed to export could overwhelm the country's storage tanks, which are already filled with near-record inventories.

Compounding the production glut is an expectation of a mild winter as a result of an El Nino weather pattern, which is expected to limit heating oil demand.

The market may also have to accommodate a rapid rise in Iranian oil exports if sanctions are lifted, which many analysts say could happen in the first half of 2016.

One option to deal with the glut would be to use crude oil tankers for storage. But this requires a price curve in which oil is sufficiently more expensive in the future than for immediate delivery - a market structure known as contango - so that holding costs can be covered.

High tanker rates and a relatively flat price curve make floating storage unattractive for now, however, so analysts say spot prices would have to drop further to make storing crude on ships a viable market strategy.