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Is a big move in oil prices due?

By Brian Noble - posted Monday, 3 July 2017


In options trading, a straddle is literally a sit-on-the-fence strategy. By purchasing a put and a call at the same strike (price of underlying commodity) for the same time period, an investor isn’t making a conventional directional bet; rather the investor is looking for a big move either up or down. The rub is that the big move must be greater than the sum of the two option premia or the bet goes south. But that is in the nature of the trade.

From a fundamental industry perspective (Conflicting News Keeps Oil Prices Down) to a more specifically trading focus (Are Oil Markets Becoming Untradeable?) confusion has reigned supreme in the crude oil markets of late. WTI is down about 12 percent for the month of June and is set for its longest run of weekly declines since 2015. In addition, crude has been displaying considerable price volatility on a day-by-day basis, largely to the downside. So would anybody be putting on a straddle in the WTI market today? Let’s assess the situation.

Bullish considerations:

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Hurricane season in the Gulf of Mexico is upon us early.

If rigs go offline because of a vigorous hurricane season, production will be shut-in and crude prices will rise. The first storm of the season has already made land-fall, and the usual season is August-November, so the storms are early this year.

How good a job can OPEC do in terms of maintaining production cuts, discipline and compliance within OPEC and non-OPEC?
If OPEC succeeds at making the cartel march to its tune, then all will be well. In addition, future even deeper cuts will help support the oil price. What realistically are the chances of that?

Can Saudi Arabia really influence the EIA inventory numbers?

The Saudis say that the current OPEC cuts need time to impact the market. But can they themselves surreptitiously impact the market? Analyst John Kilduff of Again Capital interviewed by CNBC has made the novel suggestion that it is in their hands by changing the flow of exports from the U.S. to other markets with the effect of decreasing inventories artificially. He also thinks that unless OPEC cuts much deeper, the current game of chicken is going to continue among market participants.

Is there a credit crunch looming in the patch? At current lower crude prices, U.S. shale production could be negatively impacted over the next few months and some production could come off line as producer cash flow dries up and some of the hedges from last year begin to run off. Less drilling activity will put upward pressure on prices.

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Where is the U.S. dollar really going?
If U.S. rates are going to the moon, then the U.S. dollar will rise and commodity prices fall. But what if the Fed is done with the current rate cycle? Recent strength in WTI this past week is probably a reflection of a weaker U.S. dollar—is this a sign of things to come?

Bearish considerations:

The fundamental macro-economic backdrop to WTI has been bearish.
The CITI U.S. Macro-Economic Index (or Surprise Index) recently plunged to a six year low, meaning that economic data have been exceptionally disappointing. Global economic growth has been anything but robust, including a weak U.S. GDP print of under 2 percent, while even in so-called faster growing Europe, macro-economic conditions are soft.

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This article was first published on OilPrice.com.



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About the Author

Brian Noble writes for OilPrice.com.

Creative Commons LicenseThis work is licensed under a Creative Commons License.

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