Saudi Arabia shocked investors on Tuesday with a decision to cut crude oil production in February and March as part of an OPEC + supply agreement. Optimism around the tightening of global supply permeated the oil market, pushing reference oil futures to the highest levels in months and causing fluctuations in spreads and calendar options. While spreads have widened and options have become less pessimistic, technical indicators have warned that the oil recovery may be exaggerated.
Here are four charts that show how the supply statement from the world’s top oil producers, including Saudi Arabia and Russia, has spread to the deepest corners of the oil market.
Spreading Spreads
Timespreads – where traders bet on the price of oil for different months – showed some of the most striking improvements during Tuesday’s session. Brent’s first-month contract rose to a premium of 17 cents from a three-month contract earlier, pointing to tighter offer expectations after negotiating on a bearish trading structure in recent sessions.
Saudi Arabia’s pledge to cut 1 million extra barrels a day in February and March creates a tighter market than traders were initially anticipating after OPEC + decided last year to open taps in January.
Deferred Rally
It is not just the upcoming futures contracts that are winning. West Texas Intermediate crude for the rest of 2021 approached $ 50 a barrel on Tuesday, the highest in 10 months. This provides an additional incentive for oil producers to increase their hedge levels for the rest of the year. These volumes will come not only from American producers, but also from West Africa and the North Sea. It is a move that also appears in timespreads further along the curve, with the WTI for December 2021 more than $ 2 above the same contract a year later. This spread has been a major trade in vaccines against coronavirus in recent weeks.
Low low options
With prospects for oil supply suddenly looking tighter, oil options markets have become less pessimistic. The so-called selling pitch – the more traders are willing to pay for bearish put options compared to bullish call options – is now close to its lowest level since February. This is a sign that traders are less prepared for price drops.
Technical Notice
Despite recent gains, technical indicators suggest that oil may have recovered too quickly. WTI oil futures closed above the top of the Bollinger Band on Tuesday in a signal that the market is overbought. Meanwhile, Brent’s 14-day Relative Strength Index hit 70, another warning that the market may be in a downturn.
“The fundamentals are still pretty pessimistic,” said Bob Yawger, head of the futures division at Mizuho Securities. “Year-over-year storage is still way above last year. This does not justify a great positive movement here, but this is the path we are following ”.
