Sun, Apr 17, 2005 - Page 10 News List

Numerous expiring options drag down crude oil futures


Crude oil futures settled lower on Friday, pulled down by the weight of expiring options, but managed to halve earlier losses of more than a dollar.

"Rising oil supply, the internal dynamics of the market and the expiration of options today brought prices lower," Conrad Goerl, a trader for hedge fund MotherRock LP in New York, told Dow Jones Newswires.

While some market participants will dismiss Friday's losses because of the negative effect of expiring options, Goerl said he expected rising oil supplies to continue to put a lid on prices.

Benchmark light, sweet crude futures for May settled down US$0.64 at US$50.49 a barrel on the New York Mercantile Exchange. The contract fell as much as US$1.13 during trade to a low of US$50, but met with strong support at that level.

London's International Petroleum Exchange Brent blend crude futures for June, which moved into the front-month spot on Friday, fell US$0.68 to settle at US$51.61 barrel.

Friday's losses stemmed from the expiry of an unusually large number of put options on May crude futures with a strike price of US$50. A put option gives purchasers the right, but not the obligation, to sell a fixed amount of a given asset at a specific price within a certain time period.

When options on oil futures expire, the price of crude tends to gravitate toward the most popular strike price.

Holders of about 15,000 put options on May crude futures were looking to exercise those options Friday, weighing the marker down, traders said.

Since touching a record high of US$58.28 a barrel April 4, oil futures have lost more than 13 percent of their value, falling for eight of the last 10 sessions.

Although US$50 served as the price floor for oil futures on Friday, Goerl estimated the bottom of market could be as low as US$45 a barrel.

In the near term, though, the strength of that US$50 floor may determine whether oil prices will rise or keep falling, said Jes Black, hedge fund manager for Black Flag Capital Partners LLC in Hoboken, New Jersey.

"Fifty dollars is most definitely a line in the sand, because it's a key psychological indicator and around the January high," he said.

"To give investors confidence that oil prices could go to US$60, the US$50 level needs to hold," Black said.

Nymex gasoline futures for May settled down US$0.0203 at US$1.4838 a gallon, while heating oil futures for the same month settled down US$0.0224 at US$1.4599 a gallon.

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