FxWirePro: Glimpse at Crude Oil Options Market ahead of OPEC meeting and EIA’s Inventory Check

The US crude prices are edging higher today, cushioned by moves in equity and FX markets, even as investors continued to anticipate a massive increase in U.S. crude output as US EIA is scheduled for inventory check tonight. During the US trading session (at 1430 GMT), the U.S. Energy Information Administration is expected to announce a 2.1 million barrel draw in inventories.

WTI CFD prices are also rising from the lows of $64.83 to the current $65.62 levels ahead of OPEC meeting (scheduled for tomorrow in Vienna), under the worst case scenario, if OPEC does not revive production, then there would be a sharp spike in the crude price tilting the global economy into recession.

The deep under-valuation of crude oil vols relative to demand and supply drivers has corrected to a large extent, but Brent M3 ATM vol is still 4-5 pts. too low. Coupled with a mixed outlook on realized volatility – potential noise from the June OPEC, seasonality of producer hedging flows, a weaker flat price environment in 2H18 and USD spillovers, all offset to some extent by cleaner spec positions –this informs a neutral view on oil vol over the next month or two if you take it on trading grounds.

A meaningful change from 1H to 2H’18 could be that upside risks to prices and vol from a disruptive spike may moderate if OPEC carefully smooths production and additional shale supply comes to the market. Crude risk-reversals nonetheless discount an overly fat left tail due to ongoing producer hedging that is ripe for continued selling for alpha generation.

Heavy producer flows in May have also pushed the 19/20 vol curve into steep backwardation. Activate a short Brent Jun’2019 70 strike (30D) put vs long Jun’20 ATMF straddle vega-neutral calendar spread to jointly fade skew richness and curve inversion.

The vol experience in crude oil option markets has unfolded very differently in 2018 compared to last year. Oil vols entered the year coming off a multi-month stretch of sustained weakness as cross-asset risk premia of all stripes compressed, and the OPEC/NOPEC shepherded rally in flat price removed any lingering tail risks of a revisit of the dark days of $40 oil.

Iran’s oil minister arrived in Austria, ahead of a meeting of the Organization of the Petroleum Exporting Countries, prepared for a fight over what Tehran has characterized as U.S. interference in the affairs of sovereign producers, according to WSJ sources.

Iran’s Oil Minister Bijan Zanganeh refused a request by the U.S. President Donald Trump that OPEC to offset rising energy prices. “OPEC is not an American organization,” Mr.  Zanganeh said. “OPEC is not an organization to receive instructions from President Trump.”

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