Navigating Crude Oil Volatility Around OPEC Meetings
OPEC is a unique organization whose decisions impact national sovereignty, energy security, and most directly on crude oil prices.
OPEC’s decisions have material influence on crude oil prices. All eyes on OPEC+ ministerial meeting taking place virtually now on June 2 (instead of an in-person meeting on June 1 as planned previously). OPEC is widely expected to roll over its production cuts until year-end to support prices until demand improves.
Supply-Demand balance will tilt in the second half of 2024 if OPEC decides to continue its production cuts as the global economy heads into a season of rising demand.
CME Group’s OPEC Watch Tool shows a 79.06% probability of the supply cuts remaining unchanged and an 18.79% likelihood of ease in cuts.
Negotiations within OPEC could be challenging as not all members are satisfied with production cuts.
Iraq's oil minister - Hayyan Abdul Ghani - said his country would not agree to another supply cut, as per Bloomberg. Iraq is OPEC's second-largest oil producer after Saudi Arabia.
Iraq and Kazakhstan's repeated breaches of their supply quotas have caused tension within the group. Promises from both countries to compensate for overproduction have not been kept.
OPEC+ has cut output by 5.86m bpd, approximately 5.7% of global demand as per Reuters.
The U.S. followed by China and India are the top three consumers of crude oil. US guzzles 20% with China consuming close to 16% of the world’s oil production.
China’s feeble demand has been a significant headwind and remains so despite its stimulus package.
CHINA'S TEPID DEMAND CONTINUES TO WEIGH ON OIL
China is the largest importer of crude oil and its second biggest consumer. Chinese demand for crude remains tepid.
Its economy is showing signs of recovery but remains uneven. Industrial output surpassed analyst expectations, growing by 6.7% YoY in April. Retail sales rose by 2.3% YoY well below analyst forecasts. Sluggish consumer demand impacts oil consumption. April oil imports fell 8.8% MoM to 44.7m tonnes.
In April, China's Manufacturing PMI rose to 51.4 from 51.1 in March, surpassing analyst expectations of 51.0. Services PMI slightly fell in April to 52.5 but remains in expansionary territory of >50.
Consumer Confidence Index rose to 89.1 but remains near record bottom levels. It is well below its average of 109.8 as Chinese consumers remain pessimistic due to persisting property crisis.
US SPR BEGINS REFILLING BUT WILL NOT MATERIALLY IMPACT OIL PRICES
The US government remains vigilant about gasoline prices in an election year. President Biden's energy advisor, Amos Hochstein, stated that the Strategic Petroleum Reserve (SPR) has enough stockpiles to address any supply concerns.
The Biden administration has been replenishing the SPR after having depleted it by 180 million barrels in 2022. US government bought back 32.3 million barrels at an average price of USD 76.98/barrel throughout 2023 and early 2024.
Having cancelled purchase of three million barrels due to elevated prices, it resumed refilling by looking to buy 3.3 million barrels earlier this month.
NAVIGATING OPEC DECISION IN JUNE
CME Group’s OPEC Watch Tool shows likelihood of different outcomes using WTI Crude Oil option prices. It assigns likelihood to each outcome based on nearest weekly & monthly options.
Probabilities for the June meeting is derived from the Jul 2024 monthly contract (LON4) and the closest active weekly option prices.
The market’s assessment of OPEC’s decision changes dynamically. Navigating a constantly shifting volatile landscape requires liquid instruments that are curated for duration risk. The CME WTI Weekly Options do precisely that.
It enables superior risk management to deftly manage short-term price fluctuations with reduced premiums due to short time-to-expiry. Traders can hedge against near-term price volatility stemming from OPEC meetings, EIA reports, geopolitical events, and weather shocks.
CME Group offers Monday, Wednesday, and Friday weekly options, each with four options available at the beginning of the month, in addition to monthly options. As each weekly option expires, new listings are introduced for the following week. These are settled into WTI Crude Oil futures.
HYPOTHETICAL TRADE SETUP
In the lead up to OPEC+ meeting, implied volatility of WTI prices is low but expected to expand closer to date.
Crude oil price action will remain muted if OPEC+ decides to extend its current voluntary cuts of 2.2 million bpd. Weekly options can help harvest near-term volatility to benefit from muted price moves using iron butterflies.
The iron butterfly is a limited reward and limited risk options strategy designed to reap gains during times of low-price volatility.
It involves four legs to the trade, namely, (1) One short ATM call option, (2) One short ATM put option, (3) One long out-of-the-money call option, and (4) One long out-of-the-money put option.
Optimal condition for executing iron butterfly is when implied volatility is high while underlying commodity price action is expected to be mild.
Based on 27/May market prices, the hypothetical trade set up using weekly crude oil options expiring on 3rd June 2024 involves (a) Selling 78 ATM Call, (b) Selling 78 Put, (c) Buying 80 Call, and (d) Buying 76 Put.
At expiry, if WTI June crude oil prices settles between USD 76.6 and USD 79.4, this trade would generate a gain of USD 1.4/barrel or USD 1,400/lot using CME WTI Crude Oil options as each lot represents one thousand barrels.
If crude oil prices rally above USD 79.4/barrel, this trade can rake up maximum loss of up to USD 0.87/barrel or USD 870/lot. If oil prices collapse below USD 76.6, then this trade will result in maximum loss of USD 0.87/barrel or USD 870/lot.
Ignoring transaction costs, the iron butterfly exhibits a reward-to-risk ratio of 1.61x with a maximum upside of USD 1,400/lot and maximum loss of USD 870/lot.
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme/.
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
OPEC’s decisions have material influence on crude oil prices. All eyes on OPEC+ ministerial meeting taking place virtually now on June 2 (instead of an in-person meeting on June 1 as planned previously). OPEC is widely expected to roll over its production cuts until year-end to support prices until demand improves.
Supply-Demand balance will tilt in the second half of 2024 if OPEC decides to continue its production cuts as the global economy heads into a season of rising demand.
Source: CME Group OPEC+ Watch Tool as of markets on 27th May 2024
CME Group’s OPEC Watch Tool shows a 79.06% probability of the supply cuts remaining unchanged and an 18.79% likelihood of ease in cuts.
Negotiations within OPEC could be challenging as not all members are satisfied with production cuts.
Iraq's oil minister - Hayyan Abdul Ghani - said his country would not agree to another supply cut, as per Bloomberg. Iraq is OPEC's second-largest oil producer after Saudi Arabia.
Iraq and Kazakhstan's repeated breaches of their supply quotas have caused tension within the group. Promises from both countries to compensate for overproduction have not been kept.
Source: OPEC
OPEC+ has cut output by 5.86m bpd, approximately 5.7% of global demand as per Reuters.
The U.S. followed by China and India are the top three consumers of crude oil. US guzzles 20% with China consuming close to 16% of the world’s oil production.
China’s feeble demand has been a significant headwind and remains so despite its stimulus package.
CHINA'S TEPID DEMAND CONTINUES TO WEIGH ON OIL
China is the largest importer of crude oil and its second biggest consumer. Chinese demand for crude remains tepid.
Its economy is showing signs of recovery but remains uneven. Industrial output surpassed analyst expectations, growing by 6.7% YoY in April. Retail sales rose by 2.3% YoY well below analyst forecasts. Sluggish consumer demand impacts oil consumption. April oil imports fell 8.8% MoM to 44.7m tonnes.
In April, China's Manufacturing PMI rose to 51.4 from 51.1 in March, surpassing analyst expectations of 51.0. Services PMI slightly fell in April to 52.5 but remains in expansionary territory of >50.
Source: TradingView
Consumer Confidence Index rose to 89.1 but remains near record bottom levels. It is well below its average of 109.8 as Chinese consumers remain pessimistic due to persisting property crisis.
Source: TradingView
US SPR BEGINS REFILLING BUT WILL NOT MATERIALLY IMPACT OIL PRICES
The US government remains vigilant about gasoline prices in an election year. President Biden's energy advisor, Amos Hochstein, stated that the Strategic Petroleum Reserve (SPR) has enough stockpiles to address any supply concerns.
The Biden administration has been replenishing the SPR after having depleted it by 180 million barrels in 2022. US government bought back 32.3 million barrels at an average price of USD 76.98/barrel throughout 2023 and early 2024.
Having cancelled purchase of three million barrels due to elevated prices, it resumed refilling by looking to buy 3.3 million barrels earlier this month.
NAVIGATING OPEC DECISION IN JUNE
CME Group’s OPEC Watch Tool shows likelihood of different outcomes using WTI Crude Oil option prices. It assigns likelihood to each outcome based on nearest weekly & monthly options.
Probabilities for the June meeting is derived from the Jul 2024 monthly contract (LON4) and the closest active weekly option prices.
Source: CME Group
The market’s assessment of OPEC’s decision changes dynamically. Navigating a constantly shifting volatile landscape requires liquid instruments that are curated for duration risk. The CME WTI Weekly Options do precisely that.
It enables superior risk management to deftly manage short-term price fluctuations with reduced premiums due to short time-to-expiry. Traders can hedge against near-term price volatility stemming from OPEC meetings, EIA reports, geopolitical events, and weather shocks.
CME Group offers Monday, Wednesday, and Friday weekly options, each with four options available at the beginning of the month, in addition to monthly options. As each weekly option expires, new listings are introduced for the following week. These are settled into WTI Crude Oil futures.
HYPOTHETICAL TRADE SETUP
In the lead up to OPEC+ meeting, implied volatility of WTI prices is low but expected to expand closer to date.
Source: CME Group
Crude oil price action will remain muted if OPEC+ decides to extend its current voluntary cuts of 2.2 million bpd. Weekly options can help harvest near-term volatility to benefit from muted price moves using iron butterflies.
The iron butterfly is a limited reward and limited risk options strategy designed to reap gains during times of low-price volatility.
It involves four legs to the trade, namely, (1) One short ATM call option, (2) One short ATM put option, (3) One long out-of-the-money call option, and (4) One long out-of-the-money put option.
Optimal condition for executing iron butterfly is when implied volatility is high while underlying commodity price action is expected to be mild.
Based on 27/May market prices, the hypothetical trade set up using weekly crude oil options expiring on 3rd June 2024 involves (a) Selling 78 ATM Call, (b) Selling 78 Put, (c) Buying 80 Call, and (d) Buying 76 Put.
Source: CME QuikStrike
At expiry, if WTI June crude oil prices settles between USD 76.6 and USD 79.4, this trade would generate a gain of USD 1.4/barrel or USD 1,400/lot using CME WTI Crude Oil options as each lot represents one thousand barrels.
If crude oil prices rally above USD 79.4/barrel, this trade can rake up maximum loss of up to USD 0.87/barrel or USD 870/lot. If oil prices collapse below USD 76.6, then this trade will result in maximum loss of USD 0.87/barrel or USD 870/lot.
Ignoring transaction costs, the iron butterfly exhibits a reward-to-risk ratio of 1.61x with a maximum upside of USD 1,400/lot and maximum loss of USD 870/lot.
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme/.
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
Full Disclaimer - linktr.ee/mintfinance
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