Saudi Arabia shocked investors on Tuesday with a the decision to cut oil production in February and March as part of an OPEC + supply agreement. Optimism over the tightening of the global supply has penetrated the oil market, pushing benchmark futures to the highest levels in recent months and causing fluctuations in spreads and calendar options. While spreads have accumulated and options have narrowed to a lesser level, technical indicators have warned that the gross rally may be exaggerated.
Here are four diagrams showing how the supply declaration from the world’s major crude oil producers, including Saudi Arabia and Russia, has crossed the deepest corners of the oil market.
Growing springs
Timespreads – where traders have been betting on oil prices for several months – showed some of the most marked improvements during Tuesday’s session. Brent’s first-month contract rose to a 17-cent premium from the three-month contract, indicating expectations for a tighter supply after trading in a bearish contango structure over the past few sessions.
Saudi Arabia’s commitment to cut another 1 million barrels a day for February and March is preparing for a tighter market than traders initially anticipated after OPEC + decided last year to loosen taps in January.
The rally postponed
Don’t just win nearby futures contracts. West Texas Intermediate’s gross product for the remainder of 2021 on Tuesday approached $ 50 a barrel, the highest in 10 months. This provides an additional incentive for oil producers to increase their coverage 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 is also showing up in time, along the curve, with WTI for December 2021 with over $ 2 over the same contract a year later. This spread has been a hot trade in the coronavirus vaccine in recent weeks.
Barely Bear Options
As the outlook for crude oil supply appears sharper, oil option markets have grown less downward. The so-called power decline – how many traders are willing to pay for putish options to sell following calls – is now close to the lowest level in February. This is a sign that traders are less prepared for falling prices.
Technical warning
Despite recent gains, technical indicators suggest that oil has accumulated too much too quickly. WTI crude futures settled above the Bollinger Band on Tuesday, a sign that the market is overbought. Meanwhile, Brent’s 14-day Relative Strength Index reached 70, another warning that the market could be due to a retreat.
“The fundamentals are still pretty bearish,” said Bob Yawger, head of the futures division at Mizuho Securities. “Year-over-year storage is still much higher than last year. This does not justify an important move to the top here, but this is the trajectory we are heading. “
