(Repeats Jan 7 story)
* Oil traders buy bearish options at $30 and $25/barrel
* Canadian oil sells below cost of production
* Focus switches to slowing demand in China, U.S. and EU
* Global stocks hit new records as supply balloons
By Dmitry Zhdannikov
LONDON, Jan 7 (Reuters) - When U.S. investment bank Goldman
Sachs said last year that oil could fall as low as $20 per
barrel, it assigned a fairly low probability to that scenario.
Fast-forward five months and in some parts of the world the
forecast has already proved correct. Canadian physical crude has
been selling this week at below $20 per barrel, less than it
costs to extract and transport. Traders in the options market,
meanwhile, are taking protection against prices falling below
$25.
The developments reflect growing concerns that a market
already awash in too much oil is now suffering the double-whammy
of a sharp slowdown in U.S. and Chinese demand.
For the past 18 months, oversupply has been the main factor
responsible for dragging down prices by two-thirds, after Saudi
Arabia pushed OPEC to ramp up exports to fight for market share
with higher-cost producers such as U.S. shale firms.
Low prices spurred global demand to multi-year highs, saving
oil from a further collapse and encouraging producers to hope
that the market might recover later in 2016.
But just as Saudi Arabia was about to start celebrating its
first tactical victories, with U.S. output declining under
pressure from low prices, signs are emerging that demand in the
United States, China and Europe is much weaker than anticipated.
Estimated demand from China, the world's second largest
consumer and the engine of global economic growth since the
commodities boom started in the early 2000s, fell in both
September and November, compared to the same months of 2014.
U.S. demand, the world's largest, began falling from
October, according to the latest available data, despite low
gasoline prices, while U.S. distillate demand slid to its lowest
for more than a decade towards the end of 2015.
Demand in the European Union turned flat in October, having
surprised on the upside throughout most of the year.
"2015 started off with a spectacular growth in demand. But
in the last quarter of 2015, things seem to have changed," said
Abhishek Deshpande, an analyst at banking and investment group
Natixis.
"SUPPORTS CRUMBLING"
Goldman's drastic scenario was based on the logic that the
market might have to undergo a $20 per barrel price shock in
order to force an acceleration in the shutdown of unprofitable
production.
That no longer seems fanciful.
"Oil has been under pressure as of late, and downside risks
of a dip into the $20s have grown," Bank of America (N:BAC) Merrill
Lynch said on Thursday.
The same day, Brent and WTI futures fell briefly to their
lowest levels since 2004, near $32 per barrel, as a sliding yuan
and an emergency halt in Chinese stockmarket trading left Asian
markets in turmoil. O/R
For oil prices to fall as much as 5 percent in early and
usually calm Asian trading hours is very rare, and even veteran
chart-watchers are now struggling to draw a line under the
biggest rout in decades.
"The supports are crumbling... There is not a winning long
in the market - maximum pain is lower. It is not advised to be
long," said Robin Bieber of brokers PVM.
He said there would not be much to stop oil falling into the
mid-$20s if WTI crude fell below the $32.40 a barrel support
level. Minutes later, WTI fell as low as $32.10, although prices
slightly recovered towards $34 per barrel later in the day.
NEGATIVE OIL
Over the past year, the world has been producing 1.5 million
bpd more oil than it consumes. OPEC and the International Energy
Agency expect global demand growth to slow in 2016 to around
1.20-1.25 million barrels per day from a very high 1.8 million
bpd in 2015.
That means that for most of 2016 the world will still be
producing more than it can consume, adding to record stockpiles
already exceeding 3 billion barrels.
The options market is showing that fears are indeed on the
rise that futures could fall further. The Chicago Board Options
Exchange's oil volatility index .OVX has risen 20 percent so
far this year.
Implied volatility in ICE Brent options - including the
$30/barrel and $25/barrel Feb 16 option LCO3000N6 LCO2500N6
- has spiked in recent weeks. Some investors are protecting
themselves by acquiring put options giving them the right to
sell at $25, anticipating that Brent will fall below that.
"There has been more interest in buying options like $25
puts and open interest has increased. Volatility has been
rallying. The action that we have seen shows that people have a
bearish slant," said a senior options trader at a major bank.
But while the futures market is only preparing for a dip
below $30 per barrel, prices in the physical markets - where oil
producers sell and refiners buy actual barrels - have already
fallen much further.
The price of an OPEC basket of 13 crude grades fell to
$29.71 a barrel on Wednesday, according to calculations from the
cartel.
Most shocking was the outright price of Canadian heavy
crude, which dropped below $20 a barrel.
Northern Alberta's vast oil sands hold the world's
third-largest crude reserves but carry some of the highest
production costs globally -- up to $50 a barrel -- because of
the energy-intensive production process.
Most Canadian and U.S. companies will likely keep producing
to pay bills and loans, even if the crude price does not cover
cash operating costs such as extraction, blending and
transportation.
"There is a high risk a lot of these companies could fold,
but really speaking we are looking at more consolidation and
potential restructuring," Natixis analyst Deshpande said.