This week could be the most volatile week for crude oil markets in
several years, Lehman Brothers analyst Edward Morse warned his clients in a
note Friday, as speculators would try to push prices above $100/barrel before
the December contract expires.
Morse said that with 360,000 contracts still outstanding and in the hands
of financial, not physical players, it was going to be crowded at the exits,
as hedge funds and banks have to get out of those contracts before Friday.
"That they are still in Dec-07 futures suggests to us that speculators are
aiming for $100 before December futures expire," Morse said.
Adding to pull to $100/b is the WTI options market, Morse said, noting
that there were 42,000 $100 call options on the market that will be worthless
when they expire tomorrow. "Holders of these calls will attempt to push oil to
$100 in a last effort to force these options into the money," he said.
"The idea would be to buy enough futures to set off a technicals-based
rally to $100 before options expiry," Morse explained.
Once the futures price hits $100, Morse, the pressure to sell would be
fierce and prices could drop below $90/b in early December.
"In our view, the most likely scenario for next week is that WTI makes a
serious run at $100 by Tuesday. It could sell off strongly after that," Morse
said.
"We believe the selling pressure post Tuesday's options expiry may be
stronger than anything the oil market has seen in several years."
Morse said oil prices would fall unto the mid-$80/b range where banks
holding costless collars and airlines trying to hedge their fuel costs would
provide a backstop.