Crude oil prices hit the skids at the end of February and have continued to slide into early spring.
Oil is again now priced around $50/barrel after a brief retreat from the $50+ range that it had been trading in after OPEC negotiated and implemented a global supply-cut agreement.
While compliance by the oil-producing nations involved in the deal is believed to be in line with expectations, oil stockpiles in the United States haven't dropped as quickly as some were likely hoping.
As discussed on the blog earlier this year, adherence to the OPEC agreement was a big question at the start of 2017. However, the plot has thickened as US stockpiles remain stubbornly high.
The market has shifted its attention to the end of June, which is when the current six-month OPEC deal is set to expire. Starting fairly soon, the countries involved in the original deal will have to decide whether they'll extend it, amend it, or trash it completely.
Considering OPEC's history of last-minute wheeling and dealing, there's a good chance none of this will be finalized until the end of June.
For traders involved in oil, or assets linked to it, that means the weekly inventory numbers in the US, as well as monthly production numbers out of the OPEC region, will likely take center stage for the next several months.
Rhetoric out of OPEC will surely be splashed across the headlines of most financial news outlets for the foreseeable future, as well. And while that activity may move markets in the near term, the ultimate direction of oil through the end of the year will likely depend on whether the deal is extended or not.
Interestingly, the broader equity market rally (aka "Trump Rally") has also slowed down, and even reversed to some degree. With oil now sitting in a much more precarious position, one has to think these two developments are linked. Surely, the perceived unraveling of the Trump political agenda, and the fuzziness of the political landscape in the United States in general, has added to uncertainty.
If you are looking at opportunities in crude oil, a recent episode of Closing the Gap - Futures Edition is without a doubt worth a few moments of your time.
Using the CBOE Crude Oil Volatility Index (OVX), which is essentially the VIX for crude oil, the team extrapolates the "expected move" in crude oil for the May and June futures contracts.
On the show, historical data is analyzed and presented that illustrates 70.38% of the time since 2007 the actual 45-day move in /CL (oil futures) has been below the OVX implied one standard deviation move. This finding is depicted in the chart below (note the left side of the chart which indicates actual versus expected moves):
The information included in this episode is certainly helpful for anyone trading oil, or considering doing so in the future. If nothing else, knowing where the market has drawn the lines in the sand in terms of expected moves for crude oil in May and June is an interesting reference point.
According to tastytrade research related to the OVX and crude oil futures, the market is expecting a move of approximately $3.77 in the May contract, and $5.73 in the June contract.
It’s important to note that crude oil prices could also be affected by border-adjustment tax code changes in the US. While that topic has been moved to the back-burner for the time being, volatility in crude oil prices could increase if/when US politicians revive negotiations related to protectionist economic policies in the United States.
We hope you’ll take the time to review the complete episode of Closing the Gap - Futures Edition focusing on crude oil futures when your schedule allows.
If you have any questions about the topics presented today, or anything else for that matter, we hope you'll reach out directly at firstname.lastname@example.org.
We look forward to hearing from you!
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.