Saudi Arabia shocked investors on Tuesday with a decided to cut crude production in February and March as part of an OPEC + supply agreement. The optimism surrounding the tightening of the world supply permeated through the oil market, which pushed the norms of crude futures to the highest levels in months and caused the volatility in calendar spreads and options. As the spreads rose and options became less bearish, technical indicators warned that the rise in crude oil may be exaggerated.
Here are four maps showing how the offer statement of the world’s most important raw producers, including Saudi Arabia and Russia, has rippled across the deepest corners of the oil market.
Surging Spreads
Time spreads – where traders bet several months on the oil price – showed some improvement during Tuesday’s session. Brent’s contract on the previous month rose to a premium of 17 cents from the three-month contract, indicating expectations for tighter stocks after trading the last sessions in a bearish contango structure.
Saudi Arabia’s promise to cut an extra barrel per day for February and March for February and March for a tighter market than traders initially expected after OPEC + decided last year to release the taps in January.
Deferred rally
These are not just near futures contracts. West Texas Intermediate crude for the rest of 2021 approached $ 50 a barrel on Tuesday, the highest in ten months. This provides an extra incentive for oil producers to increase their hedging levels for the rest of the year. These volumes come not only from American producers, but also from West Africa and the North Sea. This is a step that also appears further along the curve over time, with WTI for December 2021 more than $ 2 above the same contract a year later. The spread has been a very serious vaccine against coronavirus in recent weeks.
Rare Bearish Options
As the outlook for crude supply suddenly seems tighter, oil option markets have become less bearish. The so-called pit skew – how many more traders are willing to pay for clumsy put options above bullish calls – is now close to the lowest level since February. This is a sign that traders are less focused on price declines.
Technical warning
Despite recent gains, technical indicators suggest that oil may have risen too fast. WTI’s crude futures settled above the Bollinger band on Tuesday in a sign that the market has bought too much. Meanwhile, Brent’s relative strength index of 14 days hit 70, another warning that the market could possibly retreat.
“The fundamentals are still pretty clumsy,” said Bob Yawger, head of the futures division of Mizuho Securities. ‘Annual storage is still much higher than last year. That does not justify a big move to the upside here, but it is the trajectory we are heading. ”
