Saudi Arabia shocked investors with a Tuesday decides to cut crude oil production in February and March as part of an OPEC + supply agreement. Optimism surrounding the tightening of global supply penetrated the oil market, pushing benchmark crude oil futures to their highest levels in months and causing swings in calendar spreads and options. As spreads rebounded and options became less bearish, technical indicators warned the crude oil rally could be excessive.
Here are four graphs showing how the delivery statements of the world’s top crude oil producers, including Saudi Arabia and Russia, rippled through the deepest reaches of the oil market.
Rising spreads
Timespreads – where traders bet on the oil price for several months – showed some of the most noticeable improvements during Tuesday’s session. Brent’s first month contract rose to a 17 cent premium over the three month contract, indicating expectations for tighter stocks after trading in a bearish contango structure for the past few sessions.
Saudi Arabia’s pledge to cut an additional 1 million barrels per day by February and March is creating a tighter market than traders initially expected after OPEC + decided to loosen taps a bit in January last year.
Postponed meeting
It’s not just nearby futures contracts that win. West Texas Intermediate crude oil for the remainder of 2021 came close to $ 50 a barrel on Tuesday, the highest level in 10 months. This provides an additional incentive for oil producers to increase their hedging level for the rest of the year. Those volumes come not only from American producers, but also from West Africa and the North Sea. It’s a move that also appears in the time spread further along the curve, with WTI for December 2021 more than $ 2 above the same contract a year later. That spread has been a hot trade in coronavirus vaccines in recent weeks.
Hardly any bearish options
With the outlook for crude oil supplies suddenly tighter, the markets for oil options have turned less bearish. The so-called put skew – how much more traders are willing to pay for bearish put options over bullish calls – is now close to its lowest level since February. That is a sign that traders are less prepared for price falls.
Technical warning
Despite recent gains, technical indicators suggest that oil may have risen too quickly. WTI crude oil futures were settled above the upper Bollinger Band on Tuesday, as a sign that the market is overbought. Meanwhile, Brent’s 14-day Relative Strength Index hit 70, another warning that the market may be ready for a pullback.
“The fundamentals are still pretty bearish,” said Bob Yawger, head of the futures division at Mizuho Securities. “Year-on-year storage is still far above last year. That doesn’t justify a major upward move here, but that’s the trajectory we’re going into. “
