What happens when the largest suppliers of oil in the world steadily keep churning out more barrels of oil in greater supply than demand? We might just find out.
Tomorrow in Vienna, OPEC is meeting on the future of 12 nations and their oil output into the global world economy. The expectation of the meeting is that the represented countries will not restrain their production of oil and supply into the global market by decreasing their quota. More likely, they will increase their quota above the current target, according to Barclays. OPEC currently supplies 32% of the world’s oil production and more production could mean a glut of oil where there is possible lack of demand.
As to why the increase in quota, the Saudi Oil Minister Ali al-Naimi said on Thursday that crude oil supply is declining. Along with U.S. Crude Oil stockpile falling 1.95 million barrels, more than the 1.7 million estimated (implying either higher demand or weaker supply), market speculation regarding the potential for the increased quota has already led to a decline in oil prices this week.
The price decline has frustrated a lot of market speculators in oil, who do not know what the new normal for oil has become (two years ago the normal was around $98 a barrel for WTI Oil, now it is oscillating around $60 a barrel) and are waiting until OPEC makes any announcements regarding its quota output before executing new positions.
There is much speculation whether OPEC’s announcement will drive prices up or down, the following are two option positions and one strategy you may use in the coming days with oil volatility possibly about to spike after the OPEC announcement.
There are many different ways to trade WTI OIL. The below trade examples show you three different methods using the optionsReasy web-platform.
WTI OIL Uptrend - Long (buy) Call Trade
If you expect as an option trader WTI OIL to take an upward trend, you may buy a WTI OIL Call option because a Call increases in value as the underlying WTI OIL price rises. Your option strike choice depends on your outlook; if you are bullish and expect a large upward move you may want to choose a strike further away from the current underlying WTI OIL price (the option will be cheaper, however the probability of payout at expiry is lower).
The below Scenario chart and table show the Call trades profit or loss, at expiry, over a range of WTI OIL prices.
WTI OIL Downtrend - Long (buy) Put Trade
If you expect as an option trader the WTI OIL to take a downward trend in the next couple of trading days, you may buy a WTI OIL Put option because a Put increases in value as the WTI OIL price falls.
Below is an example in the optionsReasy web-platform. It is a WTI OIL Put option with 0% strike, to expire in 4 days (Monday) and for an amount of 100 barrels of oil. The risk is limited in this position.
The below Scenario chart and table show the Put trades profit or loss, at expiry, over a range of WTI OIL prices.
WTI OIL Price Volatility - Buying a Call and Put Simultaneously
If you anticipate higher volatility but are unsure of market direction in the coming days, you may buy a WTI OIL Long Straddle. This allows you to benefit from a larger move in either direction. In this position, your loss is limited and your profit may be unlimited.
To construct a long straddle, buy a Call and a Put, of the same strike rate, expiry and amount, at the same time. In the below example, the WTI OIL Call and Put options have 0% strikes (matching the current underlying price), with expiry in 4 days and an amount of 100 barrels of oil (for each leg). To learn more, read ORE's article on Trading a WTI OIL Long Straddle.
The below Scenario chart and table show the Long Straddles profit or loss, at expiry, over a range of WTI OIL prices.