The OPEC cut spurs US hedging – but against lower oil prices

NEW YORK, Oct 10 (Reuters) – The decision by the Organization of the Petroleum Exporting Countries and Allies last week to cut oil production has spurred a flurry of activity in the options market – but with more U.S. players opting for a bearish stance, CME Group data showed.

OPEC+, as the group is known, decided on Wednesday to cut its target by 2 million barrels per day (bpd), including voluntary production curbs from Saudi Arabia and other nations. Oil futures have risen over 7% since to five-week highs, as the move was seen as putting a floor under the market.

However, the US oil options market is skewed towards the purchase of put options, used to either bet on or protect against downside moves. There are several reasons why this could happen, including concerns about weaker demand, or because the cheapness of these options made it an opportune time for oil companies to buy to protect against downside.

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“I would classify the put purchases as hedges,” said Bob Iaccino, market strategist and co-founder of Path Trading Partners. “Demand is still expected to be weak and getting weaker given the overall economic picture… so it’s just massive, massive hedging in case the downside develops.”

Trading volume for U.S. crude oil futures puts and calls for November delivery rose more than 40% through Wednesday, the day of the OPEC+ meeting, from Tuesday, CME Group data showed.

Volume in puts rose to 25,615 for the November U.S. crude oil futures contract on Wednesday, up 10,922 from the previous session, CME Group said. In contrast, there were 19,473 call options – bets on a higher price – bought that day.

“The put-to-call bias actually shifted out in favor of the put after the OPEC decision,” said Bob Yawger, director of energy futures at Mizuho in New York.

On Thursday and Friday, volumes in puts were 15,579 and 25,771, respectively, while volumes in calls were 16,087 and 42,291, CME Group data showed.

Trading rose on Friday after the White House suggested last week that it would review relations with Saudi Arabia, and as it seeks ways to reduce OPEC’s control over energy prices.

In the futures market, crude oil spreads widened on Friday, with short-term contracts rising faster than later contracts. It signals renewed concern about the power supply, which is more of a bullish indicator.

“There is plenty of supply uncertainty going into 2023, and let’s not forget there is also a lot of demand uncertainty given the macro outlook,” said Warren Patterson, head of commodities research at ING.

The spread between international benchmark Brent, which expires in December 2022 versus December 2023, climbed more than 12% to above $13 a barrel on Friday, the highest since June, Refinitiv Eikon data showed.

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Reporting by Stephanie Kelly, Florence Tan and Noah Browning; editing by David Gaffen and Marguerita Choy

Our standards: Thomson Reuters Trust Principles.

Stephanie Kelly

Thomson Reuters

A New-York-based correspondent covering the US crude market and member of the energy team since 2018 covering the oil and fuel markets as well as federal policy around renewable fuels.

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