Saudi Arabia on Tuesday surprised investors with a decision to cut crude oil production in February and March as part of an OPEC + supply agreement. Optimism in narrowing the global supply was permeated by the oil market, which brought crude oil futures to the highest levels in months and led to variations in spreads and options. Calendar. Although spreads increased and options became less bearish, technical indicators warned that the rally of crude could be exaggerated.
Below are four graphs showing how the supply statement of the world’s major oil producers, including Saudi Arabia and Russia, went through the deepest corners of the oil market.
Growing spreads
Timespreads, where traders bet on the price of oil for different months, showed some of the most marked improvements during Tuesday’s session. Brent’s initial contract reached a premium of 17 cents over the three-month contract, pointing to tighter supply expectations after trading in a bearish contango structure in recent sessions.
Saudi Arabia’s commitment to cut one million barrels a day by February and March sets a tighter market than traders initially anticipated after OPEC + decided last year to turn off the taps in January.
Deferred rally
They don’t just win near-term futures contracts. West Texas crude oil for the rest of 2021 on Tuesday approached $ 50 a barrel, the highest in ten months. This provides an additional incentive for oil producers to increase their coverage levels for the rest of the year. These volumes will not only come from American producers, but also from West Africa and the North Sea. This is a move that also appears in longer time periods along the curve, with WTI for December 2021 more than $ 2 above the same contract a year later. This spread has been a hot trade in coronavirus vaccines in recent weeks.
Barely bearish options
With the outlook for crude oil supply narrowing sharply, oil options markets have grown less downward. The so-called putt slope (the more willing traders are to pay for low bearish options above bullish calls) is now near its lowest level since February. This is a sign that traders are less prepared to go down in price.
Technical warning
Despite recent gains, technical indicators suggest that oil may have risen too quickly. WTI crude futures settled above Bollinger’s top band on Tuesday, signaling the market is overbought. Meanwhile, Brent’s 14-day relative strength index hit 70, another warning that the market could have to retreat.
“The fundamentals are still pretty bearish,” said Bob Yawger, head of Mizuho Securities ’futures division. “Year-on-year storage is still well above last year. That doesn’t justify a big step forward here, but that’s the direction we’re heading. “
