‘Oil cut deal upends not just prices’

Bloomberg

No matter where you look in the oil market, key markers watched by traders have been going haywire since Wednesday — and they show little sign of letting up. Whether it’s a futures curve suddenly suggesting concerns that supply is shrinking or record trading of contracts designed to protect against price fluctuations, OPEC’s first output cut in eight years has sent the market into a spin. “It looks like OPEC saved the US drillers, with 2018 likely falling on producer hedging and mid-2017 dropping on expectation of OPEC creating a tighter market,” Giovanni Staunovo, commodity analyst at UBS Group AG in Zurich, said by e-mail.
“I’m not surprised that volatility was really high into the meeting because the outcome was so binary, but now I would expect it to come down a lot,” Societe Generale senior commodity strategist Jesper Dannesboe said by phone. He said he expects more demand for put options as US producers lock in output at profitable levels.
OPEC has also provided a boon to the world’s largest oil exchanges. Combined volumes of trading of Brent crude on ICE Futures Europe and WTI on the New York Mercantile Exchange surged past previous records. WTI volumes rose above 2 million contracts, equating to 2 billion barrels, for the first time ever. ICE Brent futures were just below the 2 million level, according to provisional data. The total amount of crude traded on both exchanges was the equivalent of about 45 days of global supply.
WTI options traders rushed to buy more contracts than ever, particularly those that profit when WTI rises above $60 a barrel. Olivier Jakob, managing director at consultant Petromatrix GmbH, said that “trading in WTI options has entered into a new dimension,” citing a “huge” addition of $60 call option contracts. There were also sizable trades of more than $10 million placed prior to OPEC’s decision.
The gulf between Brent and WTI on Thursday hit its widest level since the end of September. That’s in part because an OPEC production cut affects global markets more than those in the US, according to UBS’s Staunovo. The gap between the two had narrowed markedly from last year, after US lifted its restrictions on crude exports. Cheaper crudes typically garner more buying interest.
“The WTI-Brent spread should
lead to increased US exports,” Sarah Emerson, managing director of ESAI Energy Inc., a consulting company
in Wakefield, Massachusetts, said by telephone. “The OPEC agreement helps US producers.”