As OPEC ministers prepare to meet in Vienna next month to thrash out a keenly anticipated but still uncertain cut to crude output, oil traders are jostling for position in futures and options markets in a bid to capitalise on any deal.
While any cut agreed by Organisation of the Petroleum Exporting Countries (OPEC) at its Nov. 30 meeting could take effect as soon as Dec. 1, traders say the biggest price impact will be in contracts for delivery in early 2017, especially the February contract, rather than in the spot market.
“The reason why you’re not going to see any impact on Q4 2016 prices is because by November when this decision is made you are going to be trading January or February barrels,” said Virendra Chauhan, crude oil analyst at trading consultancy Energy Aspects in Singapore.
Even January data will be less affected as it expires on the day of the meeting, leaving February as the first contract that covers the meeting itself.
Market data shows a steady inflow of new positions into the February contract lately, with the number of positions – known as open interest – in February futures up 48 percent since OPEC flagged the prospect of an output cut on Sept. 28.
The options market has also recorded a jump in activity tied to February.
Positions tied to February puts (options to sell) and calls (options to buy) have both risen, but the number of puts at the top five most popular February ‘strike prices’ increased by roughly twice the amount as the number at the top five call options.
This suggests broadly defensive manoeuvres by participants such as producers who likely locked in price floors for some of their future production.
Open interest in March futures, which also cover the period when any potential supply adjustments will be felt, has risen by 12.7 percent since Sept. 28. February and March futures prices are both up by roughly 5.5 percent since then.
2008 WAS DIFFERENT
The last time OPEC cut output to prop up the market was in 2008, during the unfolding global financial crisis.
The impact of that cut, which took effect on Nov. 1, 2008, was only seen in OPEC’s January 2009 production of 28.69 million bpd, down from 30.22 million bpd in two months earlier.
Oil prices fell sharply from around the low $60s a barrel level in late October, then stabilised around $45 a barrel in January before recovering over the course of the year.
But the overall situation back then was vastly different. OPEC cut by more than is planned today, slashing output by 1.5 million barrels per day (bpd), but acted in response to a slump in demand.
The key concern now is supply. The U.S. shale revolution has turned the United States into a top-3 producer, and soaring OPEC and post-Soviet era production in Russia has led to an enduring global production overhang.
Most analysts say that global production will remain high even if OPEC does cut, so they do not expect big price jumps following a deal.
Bernstein Energy this month cut its Brent crude oil price forecast for 2017 to $60 per barrel, down from $70 per barrel previously.
“Record supply from OPEC year-to-date, weaker global GDP estimates, and still elevated inventories cause us to lower and flatten our oil price outlook,” the firm said.
That view is also reflected in the forward curve for Brent futures of today versus that of 2008.
Back then, the Brent forward price curve just ahead of the anticipated OPEC cut showed a steep contango structure, where prices for delivery six months on were over $10 per barrel more expensive than those for immediate delivery.
The current contango is less than $5 for the same time span, suggesting market participants see a much more muted impact.