Get Ready: Oil Volatility Spikes Ahead of Key OPEC Meeting
Crude oil has been ripping in both directions throughout 2019, and the volatility doesn’t look like it’ll be ending anytime soon. That’s good news for traders.
During the first two days of July, members of the Organization of the Petroleum Exporting Countries (OPEC) are scheduled to meet in Vienna. While the first day represents the 176th meeting of the official OPEC members, it’s the second day that will likely garner the most attention.
That’s because it’s the group known as “OPEC-Plus” scheduled to meet on July 2.
OPEC-Plus is the moniker assigned to the informal group, which includes both OPEC members and non-members (such as Russia), that have been colluding since 2017 to maintain a strict limit on the daily production of crude oil.
Known as the “OPEC production cuts,” this coordinated action basically works to cap the daily supply of crude oil in the marketplace. The intent is to balance supply closely with demand, and in turn to boost the price of crude oil artificially.
On July 2, it’s widely expected that OPEC-Plus will maintain the 1.2 million barrel per day supply cut that’s been in place (in some form or another) since the start of 2017. It’s possible that OPEC-Plus might even decide to increase the production cut—meaning they could further limit crude oil supplies coming to the global market.
At this point, it’s almost a foregone conclusion that any cuts will be extended until the end of year, which would add another six months to a coordinated effort that’s already been in place for two and a half years. That’s a significant period in which motorists and commercial shipping companies can only dream of “what could have been” in terms of prices at the pump.
What’s most intriguing about the upcoming OPEC-Plus meeting is that it comes at a time when crude oil prices have already been besieged by a flurry of complicated dynamics.
As with any commodity, one of the biggest factors is, of course, demand.
And while worldwide demand for crude oil remains strong, the U.S.-China trade war has pushed down expectations for global growth, which in turn have pushed down demand expectations for crude oil. Crude oil is particularly susceptible to downside weakness associated with demand because the market is already saturated with oil, causing OPEC-Plus to intervene.
However, a second narrative in the crude oil sector is also pressuring prices, but it’s on the other end of the spectrum—the bullish forces pushing crude oil higher.
During the week of June 17, crude oil made its biggest weekly gain in nearly 30 months when it rallied approximately 9% in only five business days. The reason behind the spike was rooted in rising tensions across the Middle East.
Since mid-May, an unknown group has been targeting oil tankers traveling through the Persian Gulf, the Strait of Hormuz and the Gulf of Oman, which together make up one of the world’s most important arteries for the seaborne transit of oil. Little is known about the rationale behind the attacks, and the entire region is on high-alert as a result.
Alongside the oil tanker attacks, the U.S. and Iran have also been ratcheting up the intensity in what has amounted to a high-stakes game of rhetorical ping-pong. The rhetoric spilled over into action when Iran shot down an unmanned U.S. military drone operating near the Persian Gulf.
Oil has historically reacted bullishly to geopolitical flash-points in the Middle East, and this time around it’s been no different. The 9% gain seen in oil during the week of June 17 is without question attributable to the increasing likelihood that an all-out military conflict could consume the region.
In terms of volatility, one can’t overlook the fact that before June 17, crude oil had slid from about $66 per barrel on April 23, to roughly $52 per barrel on June 14. That slide represented a decrease of nearly 21% in just less than two months and was mostly attributable to declining demand expectations associated with the trade war.
With oil rebounding to $60 in just over a week, many traders have felt dazed by the intensity of volatility in the underlying price of oil. And based on the calendar, it looks like oil may have stepped off one rollercoaster only to jump back on another.
Two of the three biggest narratives affecting crude oil are prepped to make big news in the coming days.
On June 28-29, the presidents of the U.S. and China will meet on the sidelines of the G20 meeting to discuss their ongoing trade war. It was the derailment of those negotiations that originally pushed oil prices lower from April 23 through June 14.
Then, on July 1-2, OPEC-Plus will meet to debate the current supply cuts and whether they should be ended, extended or deepened. Any surprises from either of these meetings would almost certainly catalyze a huge move in the price of oil.
Traders seeking to follow the action should add not only crude oil to their watchlists but also the Crude Oil Volatility Index (OVX), which operates much like the VIX does for the S&P 500. The OVX has been trading at heightened levels since oil started see-sawing in May and June. Volatility traders often use the OVX as a signal for identifying cheap and/or expensive premium in the energy sector.
With the OVX already trading at the higher end of its recent range, there could be plenty of fresh opportunities to trade volatility in the energy space in the coming weeks and months.
For more information on current opportunities in the energy sector, a recent installment of Closing the Gap – Futures Edition on the tastytrade financial network is highly recommended.
Sage Anderson is a pseudonym. The contributor has an extensive background in trading equity derivatives and managing volatility-based portfolios as a former prop trading firm employee. The contributor is not an employee of luckbox, tastytrade or any affiliated companies. Readers can direct questions about any of the topics covered in this blog post, or any other trading-related subject, to support@luckboxmagazine.com.
