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Everything you need to know about the upcoming OPEC meeting

OPEC’s next meeting is scheduled for this upcoming Thursday, November 30th. While the meeting itself is expected to go smoothly, OPEC’s impact has been waning since Russia joined the conversation late last year (see also “Putin Crowns Himself OPEC King“). TankerTrackers is looking for an extension of the relatively successful production cuts that were implemented November 30th of last year, potentially with more nations added to the deal. Money managers have not forgotten the last meeting (25 May 2017) in which the prudent move was to buy the rumor and sell the news.

As of Friday’s close, WTI ended the week +4.0% and Brent finished +1.8%.

Conflicting 2018 forecasts

In their Oil Market Report released earlier this month, the International Energy Agency (IEA) lowered its demand forecast for this year and next. Opposingly, OPEC’s forecast for 2018 was adjusted higher in their November Monthly Oil Market Report. Obviously only one of these predictions can be correct – but one can’t help but wonder – with the political machinations going on in Saudi Arabia – if OPEC’s forecast is somewhat biased.

Systemically low volatility has subjugated oil markets

In spite of the upcoming meeting and unrest in the middle east, oil vol has been steadily ticking down since the middle of the year and is currently at lows not sustained since 2014. Pictured below are the constant maturity volatilities for 7, 14, and 30 day ATM options:

Upcoming options expirations offer unique precision to play the meeting

LO1Z7 expires Dec 1st (underlying CLF8)
LO2Z7 expires Dec 8th (underlying CLF8)
LOF8 expires Dec 14th (underlying CLF8)

Open interest and max pain

Max pain prices are unsurprisingly strictly decreasing. For more information on max pain login to QuikStrike and go to “Market Reports” –> “OI – Max Pain” –> “What is Max Pain?” (in the upper right hand corner).

Spotlight on Oil

Unrest in the Saudi Arabian political sphere over the weekend drove oil up more than 3% in Monday’s trading session with Brent above $64 and WTI above $57 – highs not seen since summer 2015. After nearly a year and a half of rangebound trading, global geopolitical uncertainty seems to be giving an already bullish market the confidence to run.

ATM volatility predictably jumped as well with a larger jump in WTI than in Brent:

And here are the vol curves compared to a week ago:

For non-oil traders, here’s a short breakdown of Brent vs WTI:

Brent – light sweet crude oil extracted from one of four oil fields in the North Sea. Typically refined in Northwest Europe. Contracts are listed on the ICE.
WTI – light(er) sweet(er) crude oil produced in the United States, price settled at Cushing, Oklahoma. Typically refined in the midwest and gulf coast regions. Contracts are listed on the NYMEX (part of CMEGroup).

(Both contracts are quoted in USD. Contract sizes are 1,000 barrels with a tick ($0.01) worth $10.)

Oil and Gold Update

Friday’s 3% drop in crude oil definitively broke below $50/barrel with open interest for WTI (as reported in the COT Report) at all time highs. Headlines cite lessening concerns regarding Tropical Storm Nate and oversupply issues. Volatility remains subdued though ahead of OPEC’s Monthly Oil Market Report on Weds followed by the IEA’s report on Thurs.

The WTI COT Report also shows that Producers – who have a natural bias to be short – haven’t been net short this little since Jan 2015 (AKA their net position, while still short, is the longest it’s been in awhile). In Brent, the Money Mangers’ net position is the shortest it’s been in our data’s history (dating back to 2008).

Funny trade in gold on Friday as well – expiring over a year from now the following trade was blocked – all new positioning:

– 7,500 Dec18 2000 calls @ 3
– 7,500 Dec18 2600 calls @ 0.15
– 15,000 Dec18 3000 calls @ 0.1

The sizes make it look like a call spread stupid (the 2000-3000 call spread WITH the 2600-3000 call spread) for when the SHTF – but that far out both in strike and expiry, who knows.

Market Update

This week starts with Jackson Hole behind us, Hurricane Harvey still playing out, and NFPs/debt ceiling concerns looming on the horizon. S&P500 ATM volatility (and put skew) has come back down to earth in spite of realized vol creeping higher while the dollar index is at the lowest level it’s seen since Jan 2016.

Energy

As of Sunday evening, according to the WSJ Hurricane Harvey has taken out ~15% of the US’ oil refining capacity as it continues its destruction and energy markets prepare for a bumpy week. WTI futures are pivoting around the new year although gasoline (RBOB) futures could end up being the more interesting story having caught a pure bid with front contracts up 5.8%:
WTI
RBOB

Gold

Thus far in 2017 gold has been unable to break $1,300 although not for lack of trying. With spot prices threatening the high-water mark again the COT report shows that managed money (AKA speculators) have reduced their short positions to the lowest absolute level since mid-Dec 2012:
Gold
Dec 2012 started a ~40% decline in gold prices so YMMV.
Longer dated constant maturity vols are near recent lows, while 7-day CM vol is hovering around average on a 1-year timeline so it appears that the market isn’t setup for any long-term surprises (with the exception of the occasional volume spike like the one on Friday ahead of Yellen’s speech):
Gold Vol Cone
Gold Volume Spike