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USOIL option sentiment based on CME data analysisA big "butterfly" was detected in the January oil contract, which is a directional strategy with a target of $90, also known as the previous local maximum. It's important to note that this strategy appeared after a 4.7% decrease and when the 90 price was significantly lower and oversold for our mysterious participant, let's call him "X". *********To summarize, such a situation can be interpreted as clearly positive. However, it is worth waiting for additional confirming factors. Do not hurry to open longs right now!
NYMEX:CLF2024Long
by ClashChartsTeam
Exploring Seasonality in Crude Oil PricesWhat rises, must fall. What comes down, goes up again. This rings most true for crude oil prices. Both secular and seasonal trends are at play in crude oil prices. Demand for oil moves in tandem with global economic activities. Key secular trends impacting oil markets over this decade was covered in our previous paper . These range from falling demand from developed markets, and rising demand in emerging economies, among others. While secular trends unravel over a longer time, seasonal cyclical effects can be observed over a short term. This paper will explore consumption patterns driving annual seasonality in crude oil prices. In Part two of this paper, we will illustrate trading crude oil derivatives to harness opportunities arising from seasonality. CRUDE OIL SUPPLY CHAIN: AN OVERVIEW Gluts and shortages, economic growth and contractions, and geopolitics impact crude oil prices. Different events impact various segments of the supply chain. The global crude oil supply chain is complex and intricate. It can broadly be classified into Upstream, Midstream, and Downstream. Upstream and midstream sectors drive crude oil supply. Upstream outage or shortage affects available supply which are sometimes evened out by the midstream through adequate inventories. Downstream and midstream drives demand. End consumer demand is observed in distribution. Refineries adjust output based on their margins which in turn is derived from crude oil prices and refined product prices. WHAT DRIVES SEASONALITY? Seasonality in demand for refined products impact crude oil prices. Higher demand for refined products (gasoline, diesel, and kerosene) is observed in summer because of travel. While lower supply is caused by maintenance linked pauses in downstream during winter. Crude oil inventory shifts can be segmented into four phases, namely: (1) Inventory Build Up (Feb - May), (2) Summer Travel Spikes Demand (Jun - Aug), (3) Demand Shrinks & Supply Contracts (Sep - Nov), and (4) Winter led demand spike (Dec - Jan). This seasonality is evident in US crude oil inventory shifts as exhibited below. Impact of seasonality is not always directly apparent or predictable. Why? Crude oil is so deeply intertwined with global economics. Shocks, if any, can have an outsized impact on prices and volatility. Also, supply cuts from majors oil producers and GDP shifts in major consumers have jumbo effect on prices. Consequently, other factors moderate or nullify impact of seasonality. The below chart shows the average price behaviour of Crude oil from the start of each year over the past twenty (20) years by using CME front month crude oil futures price data from TradingView. Orange bars in the above chart represents average monthly price change measured over last twenty years. Meanwhile, the white bar shows monthly price change for the same period but after excluding the outliers. Outlier years include 2008 (global financial-crisis), 2020 (pandemic), and 2022 (Russia-Ukraine conflict). Crude prices go bullish on higher demand by refineries starting in March and continue to rise through the summer months as demand for refined products remains high driven chiefly by increased travel. However, by August, sufficient refined product inventories dampen demand. With refineries slowing for maintenance, crude demand declines leading to a moderation in price. Finally, a small uptick is observed in December as demand starts to rise again during peak winter. The average monthly returns for each month are displayed below. However, note that the standard deviation for these averages is non-trivial indicating that month-of-the-year effect on crude oil prices is uncertain and, in many cases, statistically insignificant. This conclusion is also arrived at based on various academic research papers. METHODS TO HARNESS CRUDE OIL SEASONALITY Three most common methods to harness gains from seasonality include: a. Futures (highest upside and highest downside), b. Call options (upside limited relative to futures and limited downside risk), and c. Call and/or Put Spreads (limited upside and limited downside). Traders can deploy options to express a directional view with unlimited upside and limited downside. In a long options position, the downside is limited to the premium paid. Conversely, a short position in options involves selling an option. This offers upside limited to the premium collected but exposed to unlimited downside. TRADE SET UP ILLUSTRATIONS From July until November, based on historical observations over the last twenty years, crude oil prices tend to fall. We could set up a trade using the December contract month of CME Micro Crude Oil Futures which expires on Nov 17th: 1. Short Futures: Short Futures position in MCL Dec 2023 contract (MCLZ3) at USD 70 per barrel with the anticipation that prices will fall by November. 2. Long Puts: Long Put options on MCLZ3 at a strike of USD 69 per barrel with a hypothetical options premium of USD 3 per barrel. 3. Bear Call Spread: Bear Call Spread with a net premium of USD 1 per barrel on MCLZ3 comprising of a short call option at a strike of USD 71 a barrel (collecting options premium of USD 5 per barrel) and a long call option at a strike of USD 73 a barrel (paying options premium of USD 4 per barrel). The Bear Call Spread profits a fixed amount equal to the net premium when both options expire out of the money. When only the short call options expires in the money, the position loses by having to pay the options buyer. However, when both options expire in the money the profit from the long option partially offsets this loss resulting in a capped downside. Each CME Micro Crude Oil Futures contract represents one hundred barrels of crude oil. Accordingly, the above three trade set ups are illustrated across various price scenarios as shown below. Please note that these illustrations do not include (a) transaction costs comprising of exchange trading and clearing costs and brokerage fees, and (b) capital costs associated with margins required for establishing these positions. MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
NYMEX:CL1!Education
by mintdotfinance
3
The Future of Crude Oil“We are not addicted to oil, but our cars are”, said a former CIA Chief, James Woolsey. That addiction is on the decline as we pen this paper. Love it, or hate it, but you cannot ignore it. Crude oil powers the planet. When global economy stutters, oil prices plunge. Midway through 2023, crude oil demand appears wobbly on recession overhang and shaky economic recovery in China. Meanwhile, crude supply remains tight with OPEC+ scaling back production which has been compounded by limited investment in new exploration. Over the long term, energy transition is set to fundamentally change the oil market. Consumers are shifting to EVs and renewable energy. In a befitting response, producers are reducing supply. Energy transition will be anything but a straight line. It will create many risks and present many more opportunities. This paper is set in two parts. First, we highlight key takeaways from a recent IEA report on crude oil outlook until 2028. Second, we explore hedging & trading instruments on the CME Group for participating in oil markets. PART 1: KEY TAKEAWAYS FROM IEA CRUDE OIL OUTLOOK REPORT The International Energy Agency (IEA) released Oil 2023 last week. This report describes in detail the changing dynamics in the oil market until 2028. It discusses key trends such as slowing demand growth, shifting producer growth, and the impact of energy transition on oil. Recent crises have accelerated the energy transition. With COVID-19 plus rattled geopolitics, nations are increasingly more focused than ever on energy security and independence. Ten key takeaways from Oil 2023: 1. Global oil demand to rise by 6% or 5.9M bpd between 2022 to 2028, reaching 105.7M bpd. Despite this, emissions will fall 11% with efficiency improvements. 2. Annual demand growth is expected to slow sharply in the coming years from +2.4M bpd in 2022 to just +400K bpd in 2028. 3. India and China will drive demand over the next decade while consumption among OECD countries will shrink. 4. Oil demand for gasoline will peak this year and start to reverse going forward with accelerated EV transition. Demand for transport fuels is expected to peak in 2026. 5. Jet fuel demand is still lagging 2019 levels by 13% and is expected to rise rapidly but only surpass pre-COVID levels in 2027 with expected efficiency improvements. 6. The petrochemical sector will replace the demand for transport fuels. Demand from LPG, Ethane, and Naphtha will increase by 40% from now until 2028. 7. Production growth from shale is expected to slow due to rising costs and lower prices. US shale will mature to a higher-return-lower-growth trajectory. 8. Global upstream oil and gas investment is projected to increase by 11% year-on-year in 2023, reaching USD 528 billion. This represents a rise from USD 474 billion in 2022. 9. Non-OPEC+ countries, including the United States, Brazil, and Guyana, will lead the medium-term capacity expansion plans. They are expected to contribute to a supply boost of 5.1M bpd. 10. By 2028, an additional 5.9M bpd of net production capacity will come online. The rate of new capacity building will decrease over time, aligning with projected demand growth. Following four charts help visualise the large shifts underway in the crude oil market: 1. Price Sensitivity to Imbalance: Crude oil prices are highly sensitive to imbalances between production and consumption. Over the past 25 years, consumption has been marginally higher than production. Where deficit rises, spot prices rally. 2. Consumption between developed markets (DM) and emerging markets (EM): Consumption in EM will further outpace OECD countries. Consumption across EM overtook OECD in 2013 and this trend will be further entrenched. IEA forecasts that consumption in OECD countries will hit its apex this year. Thereafter, it will start shrinking going forward. In sharp contrast, EM consumption will rise by 7.8M bpd between 2022-2028. 3. India to surpass China by 2027: Although both countries will continue to see demand increase, India will surpass China as the main source of growth by 2027. 4. Non-OPEC+ will be the primary source of growth in oil production: Production growth from OPEC+ will remain intact, while non-OPEC+ countries will be driving production growth. PART 2: CRUDE OIL DERIVATIVES CME offers a variety of instruments for producers, consumers, and investors to participate in the crude oil market. This includes WTI Futures & Options and Brent Futures & Options. Beyond these, CME also operates markets in a range of refined oil products, fuel oil, and natural gas. In a previous paper , we highlighted the 40-year history of CME Group’s WTI crude oil derivatives. With an extensive suite of derivatives on offer, CME Group enables multiple alternatives for different market participants. Futures WTI Crude is a widely used global benchmark for oil prices. It is the underlying for one of the most liquid futures contracts in the world – the CME Crude Oil Futures ("CL Futures"). CL Futures is a physically delivered contract with tight correlation to the physical oil market. Over one million contracts change hands daily, representing USD 7+ billion in notional value. Each lot of the CL Futures contract represents one thousand barrels of crude oil. CL Futures provide deep liquidity and high-quality market structure for hedgers and investors to participate in and protect against oil price volatility. Monthly contracts are available over the next ten calendar years. Front month contracts are easily tradable on CME Globex electronic order book. Longer dated contracts require engagement with inter dealer brokers for price discovery and voice-based trade execution. Alternatively, CME’s Micro Crude Oil contract (MCL) offers exposure to just 100 barrels with a maintenance margin of just USD 580 (as of 23rd June), enabling affordable participation into these markets. The micro contracts allow hedgers to manage risk exposure with greater precision. Options Monthly options are available on the underlying CL futures. They are deeply liquid with seamless order book-based trading on CME Globex. Open interest on the front month contract is >300,000 lots, representing premium of more than USD 1 Billion across calls and puts. More than 20,000 contracts are traded daily. Weekly options are used to fine-tune exposure around key events such as OPEC+ meetings and interest rate announcements. Daily options are available for CL Futures. Monthly and weekly options are also available on Micro Crude Futures. CME provides calendar spread options and mid-curve options which can be used as tactical trading and hedging tools given the seasonality of oil markets. Trading Strategies There are innumerable ways of trading the crude oil market. Most popular among them include (a) taking directional position using futures and options, (b) establishing shrewd hedges or convex trading strategies using options, and (c) trading delta-neutral calendar spreads gaining from relative shifts across the futures term structure. Previously we have covered different trading ideas in crude oil, including taking a directional position - (a) Is US Oil running low on energy? (b) Is WTI crude set to rebound? (c) Three headwinds to send crude oil into free fall , (d) Harnessing gains from mean reversion in crude oil markets , and (e) Rebounding air travel & rising China to fire up WTI crude. In our next paper, we describe the mechanics involved and illustrate the workings of popular trading strategies. KEY TAKEAWAYS In conclusion, 1. The Crude oil market is at the cusp of substantial change as energy transition powers on. 2. Change will be a constant. Impact on price will be anything but a straight line, creating both risks for the uninitiated and opportunities for the astute. 3. CME Group’s deeply liquid market with broad range of instruments enables market participants to harvest gains in risk-mitigated ways and to lock in credible reward to risk ratios. MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
NYMEX:CL1!
by mintdotfinance
1
Rebounding Air Travel & Rising China to Fire Up WTI CrudeBack in the 70s, oil prices spiked shockingly from $2.90 to $11.65 a barrel; gasoline soared 6-times from 20 cents to 120 cents a gallon in a matter of days. Fuel shortages forced factories to shut, airlines to cancel flights and stations crying "Sorry, No Gas Today". Fistfights ensued, including occasional gunfire. President Nixon called for America to end its dependence on foreign oil. In those five lines of history lies the genesis of both West Texas Intermediate (WTI) Crude Oil and WTI Crude Oil derivatives. This paper is set in two parts. Part 1 looks back at the remarkable 40-year history of CME Group’s WTI Crude Oil Derivative. Part 2 of the paper analyses the fundamental drivers fuelling WTI crude oil prices higher and an accompanying case study delivering 1.75x reward to risk. PART 1: ENABLING RISK MANAGEMENT IN ENERGY PRICES FOR FORTY YEARS Energy markets form the backbone of the global economy. Its prices can make or break nations. Unchecked volatility in energy prices can adversely impact every aspect of daily lives from food to work to shelter to travel. WTI is high-quality crude oil extracted from the Texas Permian Basin. Crude oil is then refined into gasoline, distillate, and kerosene. WTI is known as light sweet crude oil. It is considered "sweet" as it contains low levels of sulphur. Given the low density, it makes WTI "light". WTI Crude is a widely used global benchmark for oil prices. It is the underlying commodity for one of the most liquid futures contracts in the world – the CME Crude Oil Futures ("CL Futures"). CL Futures is a physically delivered contract with tight correlation to the physical oil market. Over one million contracts of CL Futures change hands daily on NYMEX, representing $7+ billion in notional values. Each lot of the CL Futures contract represents one thousand barrels of oil. CL Futures provide deep liquidity and high-quality market structure for hedgers and investors to participate in and protect against oil price action. NYMEX began trading CL Futures on March 30th, 1983. Among the pioneer commodities to list and trade on NYMEX was the WTI Crude. In November 1986, NYMEX launched American options (LO) on CL Futures allowing participants greater sophistication and flexibility in hedging against oil price volatility. In March 2008, the CME Group acquired NYMEX for $9.4 billion. In April 2014, CME introduced weekly options on CL Futures (LO1-LO5) with more granular strike prices. In December 2021 CME launched Micro WTI Futures, which further enable affordable access to the oil market. The CME also offers options on calendar spreads which are useful as tactical trading and hedging tools given the cyclicality in the oil market. PART 2: TURNING UP THE HEAT ON WTI CRUDE OIL PRICES Travel Rebound & China Re-opening. Air travel is rebounding. Global air traffic was at 75% of its pre-pandemic levels in November 2022 as per IATA. Pandemic restrictions in China held it back. With China having re-opened its borders, air traffic growth has taken off. The International Energy Administration (IEA) mentioned in its latest report that Chinese domestic air traffic had rebounded sharply in January and was well above pre-pandemic levels by February. The IEA predicts that overall global oil demand growth will increase by two million barrels per day (bpd) in 2023. It is slower than the growth of 2.6 million bpd in 2022 but nevertheless taking demand to its highest level of 102 million bpd. The OPEC expects crude oil demand to increase by 2.3 million bpd in 2023, with Chinese demand growing by 710,000 bpd. Both OPEC and IEA have lifted their forecasts for demand from China given the surprising reopening pace. Nevertheless, banking crisis, recession risk, and economic uncertainty continues to weigh in and might dampen demand. US Strategic Reserves Running at 40 Year Lows The US Department of Energy’s (DoE) Strategic Petroleum Reserve (SPR) is a reserve set up in 1975 following the oil embargo of the 1970s. These reserves are used to tackle tail events causing significant disruption to global oil supply. Last few years, there have been one too many tail events leading to the depletion of SPR. The DoE released a record 266 million barrels of crude from SPR to contain scorching inflation unseen in 40+ years. The US has signalled that it may take several years to refill the SPR and that it may never reach previous baseline of 600 million barrels given high prices. Refilling the reserves can take a long time. In the 80s, it took DoE 15 months to fill 100 million barrels. In the 2000s it took even longer – almost 2.5 years – to fill 100 million barrels. Regardless of time taken, the need to replenish is certain. The DoE has signalled that it will refill when prices trade between $67-$72 a barrel. Hence, this price range serves as a strong support and floor for WTI prices. Rotation out of Risk Off Assets. Collapse of SVB and Credit Suisse has lit up forgotten fears. Financial markets suffered a massive tailspin. Liquidity easing measures by central banks have helped assuage worries but contagion concerns remain. Heightened economic uncertainty and recessionary fears plunged crude prices to their lowest levels in more than a year, even below the SPR replenishment price range. Risk sirens are blowing loud. Unsurprisingly, investors have sought shelter in haven assets such as gold and treasuries. If measures to contain the crisis proves adequate, investors will rotate back fuelling a breezy recovery in energy prices. Supply disruptions serves as a solid tailwind. Oil demand is critical, so is supply. Last December, OPEC+ conveyed its intent to cut output by 2 million bpd in 2023. Although pre-existing production shortfalls have kept OPEC+ output below their targets, these cuts are expected to translate to 1 million bpd of real supply shortfall. Adding fuel to fire, last week a legal dispute in the middle east has led to Iraqi oil exports via Turkey to be entirely halted, disrupting 400k bpd of supply. Oil prices are sensitive to supply disruptions. Persistent disruptions will drive prices high. MARKET PARTICIPANTS ARE STILL NET LONG AND BULLISH CRUDE OIL The CFTC COT report dated March 21 indicates that investors in the Other Reportable category nearly doubled their net long position on CL Futures from before the start of the banking crisis. However, the Managed Money category showed that these investors reduced net long positions by 65%. These investors have rotated into safe havens such as precious metals. Despite the reduction, these investors still remain net long on CL Futures. A shift in market sentiment could quickly have these investors piling into CL Futures. The put/call ratio on CL options is 0.56. For every oil bear, there are about two oil bulls. In fact, this ratio has actually fallen since the banking crisis began suggesting that investors are even more bullish on oil. TRADE SET UP This case study argues that a long position in WTI Crude Oil Futures expiring in September 2023 will deliver a 2.1x reward to risk ratio given the positive price drivers. CLU2023 offers exposure to 1,000 barrels of WTI crude and has a maintenance margin of $5,000 per lot. ● Entry: 72.78 ● Target: 79.53 ● Stop: 68.92 ● Profit at Target: $6,750 ● Loss at Stop: $3,860 ● Reward-to-Risk Ratio: 1.75x To hedge or trade with granular precision and for affordable access, investors could opt for CME’s Micro WTI Crude Oil Futures which offers exposure to one hundred barrels with a maintenance margin of $500 per lot. MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
NYMEX:CLU2023Long
by mintdotfinance