Instability in International Crude Oil Markets
Futures prices on Crude Oil are 22% higher year to date and traders are wondering if $100 levels are next. In this Straits Financial Exclusive, we examine the current instability in crude oil markets, political posturing, OPEC meetings, US sanctions on Iran, and present volume and open interest data to find potential direction in the crude oil futures and options market.
Crude oil prices are rising rapidly, and US President Trump has been very vocal in expressing criticism and blame towards the Organization of Petroleum Exporting Countries (OPEC), an intergovernmental agency of 15 oil-exporting developing nations that coordinates and unifies the petroleum policies of its Member Countries. The member countries of OPEC are Algeria, Angola, Congo, Ecuador, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela.
On Twitter, Trump stated to OPEC: “We protect the countries of the Middle East, they would not be safe for very long without us, and yet they continue to push for higher and higher oil prices! We will remember. The OPEC monopoly must get prices down now!”
While the US President has been urging OPEC to increase overall production after the group put a cap on output in January 2017, Iranian OPEC Representative stated at a meeting in Algiers this past weekend that if President Trump would stop tweeting, crude prices “would be cheaper.”
With so much political banter and tweets, it’s hard to determine what different countries will do in retaliation or compliance with OPEC. We have gathered some facts to look at for further analysis and clues. Some of the recently reported activity by the top oil-producing countries are:
According to reports by Bloomberg, Iranian production is falling faster than anticipated after the US withdrew from the 2015 Iran Nuclear Deal in May this year and only a few countries, such as Saudi Arabia, can boost production as requested by the US President.
- Contrary to the President calling OPEC a “monopoly,” the countries belonging to OPEC account for just a third of oil extracted in the world, which is the smallest share it has represented in almost three decades.
- At OPEC’s last meeting, the group agreed to boost production, yet declined to state by what amount.
- OPEC August oil output hits 2018 high despite Iran losses
- Russia chimed in at the Joint Ministerial Monitoring Committee (JMCC) in Algiers this past Sunday with Russian Energy Minister Alexander Novak telling CNBC: “I don’t think we can discuss the exact number at this point but what I can tell you for sure is that we have significant potential to increase our production”.
- Forbes reports Venezuela oil production could fall to zero based on GlobalData analysis; Crude oil & gas analyst, Adrian Lara wrote: “Crude oil production in Venezuela is practically falling at an average of 10% every quarter and has been since mid-2017. A scenario with oil production in the country losing at least another 500,000 barrels per day by the end of the year is not unrealistic. Having full additional sanctions imposed would certainly send a strong geopolitical message from the U.S. at the risk of generating more instability in the world supply markets".
It appears from a trading standpoint that in the short-term, crude oil prices may be heading higher, especially in light of supply reductions in Venezuela, Iran and unclear production commitments from other countries. On the other hand, if Russia or Saudi Arabia boost production in a meaningful way, the energy markets could potentially see a respite from the recent climb and crude could steady at levels below $100 per barrel.
US Sanctions on Iran
Meanwhile, anticipation looms for November 4 as The US State Department urged companies who buy Iranian crude to end purchases by this date. The next meeting for OPEC is November 10-11 in Abu Dhabi, just ahead of a summit it will hold in December. One thing is clear: traders will be listening carefully to world leaders and oil-producing nations in advance for any indications of a change in supply or demand, especially from Saudi Arabia and Russia, the two largest oil-producing countries aside from the US.
Before that happens, let’s look to the options market to see why crude might be heading higher in the near-term.
Brent Crude Oil Options
In the options market, volume on Brent Crude options surged to a record high at the ICE exchange on Monday this week with more than 273,000 contracts traded. The top options open interest position for December’s expiration is in the $100 strike call option contract with 49,321 contracts outstanding. Based on this information, it appears to many that traders on the ICE exchange are hedging themselves for $100 Brent Crude Oil. The next largest open interest volume is in the 80-strike call option with over 38,000 outstanding. For January’s expiration, the top 5 open interest positions are in out-of-the-money call contracts with 110, 85, 90, 95, and 100 the most concentrated positions.
CME Group WTI Crude Options
Listed at the CME Group exchange, the WTI Crude Oil options have not seen as dramatic of a volume surge as Brent Crude futures but is seeing similar volume numbers relative to the ICE exchange. For example, the CME Group cleared 255,000 WTI crude options contracts on September 24; the same day ICE broke records with more than 273,000 Brent Crude options traded. To add perspective on volume, the CME Group cleared more WTI volume vs. ICE’s Brent record-breaking day on September 12th with over 287,000 options contracts changing hands.
Looking deeper into the option chains, the CME Group’s WTI Futures November 65 puts have the most contracts open right now with almost 24,000 outstanding, followed closely by the 85 calls at more than 22,000. For December’s expiration, the WTI 50 puts have the highest open interest at the time of this writing with 39,000 contracts open, and the December 80 calls have more than 35,000 contracts outstanding. For January’s expiry, the 40 puts have the most open interest with 6,000 contracts outstanding followed by the 90 calls with more than 5,000 outstanding. In February, the 95 calls have the highest outstanding contracts at almost 5,000. In comparison to Brent traders, it appears traders at the CME Group are less sure of an oil super-spike to $100 and are using more downside protection just in case.
To some, it looks as though the Brent options market is positioned for higher oil prices while WTI futures traders at CME may be less confident and invested in an upside swing. Therefore, an arbitrage opportunity may be developing in Brent and WTI Crude futures and options and traders can take advantage of potential mispricing by utilizing crude oil futures and options with a trusted global clearing partner.
At Straits Financial, we aim to keep our brokers and customers informed of current trade data, arbitrage ideas and potential opportunities that may present themselves in the futures and options markets through technical analysis, market commentary, and options information. We offer access to trading venues around the clock. Through our global offices at strategic positions around the world, we provide trading and clearing support to the derivatives exchanges that matter the most. We have been first in line to trade some of the world’s most anticipated contracts and have some of the most exclusive and coveted partnerships in the industry. Contact us today to learn more about our extensive trading, clearing and market access solutions. Every financial professional at Straits Financial is passionate about financial markets and we are proud to call our many clients partners.
To learn more about Straits Financial global offerings, please contact one of our futures and options trading specialists in the US at +1 312 462 4499 or in Singapore at +65 6672 9669. To sign up for our market commentary please click here or to receive our weekly newsletter, click here.
For the latest in energy, equities, and trade finance, please follow our Twitter account @StraitsFinancia.
DISCLAIMER: This document is issued for information purposes only. This document is not intended, and should not under any circumstances to be construed as an offer or solicitation to buy or sell, nor financial advice or recommendation in relation to any capital market product. All the information contained herein is based on publicly available information and has been obtained from sources that Straits Financial believes to be reliable and correct at the time of publishing this document. Straits Financial will not be liable for any loss or damage of any kind (whether direct, indirect or consequential losses or other economic loss of any kind) suffered due to any omission, error, inaccuracy, incompleteness, or otherwise, any reliance on such information. Trading commodity futures and options products presents a high degree of risk, and losses in excess of your initial investment may occur. Past performance or historical record of futures contracts, derivatives contracts, and commodities is not indicative of the future performance. The information in this document is subject to change without notice. The impact on market prices due to seasonal or market cycles and current news events may already be reflected in market prices.