OPEC cuts prompt US hedging, but against falling oil prices

OPEC cuts prompt US hedging, but against falling oil prices
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NEW YORK, Oct 10 (Reuters) – Last week’s decision by the Organization of the Petroleum Exporting Countries and its allies to cut oil production spurred activity in the options market – but more U.S. bettors preferred a lower position, data from the CME group showed.

OPEC+, as the group is known, decided on Wednesday to cut its target by 2 million barrels per day (bpd), including voluntary output cuts by Saudi Arabia and other nations. Oil futures rose more than 7% after hitting a five-week high as the move was seen as a bottom for the market.

However, the U.S. oil options market is skewed toward buying put options, which are used to either bet or hedge against a bearish move. There are several reasons for this, including concerns about weak demand or because the cheapness of these options makes it an opportune time for oil companies to buy to hedge against downside.

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“I would classify a buyout as a hedge,” said Bob Iaccino, chief market strategist and co-founder of Path Trading Partners. “Given the overall economic picture, demand is still expected to be weak and weaker … so it’s just a massive, massive hedge in case the downside develops.”

Trading volume for US crude oil futures rose more than 40% from Tuesday to Wednesday, the day of the OPEC+ meeting, for November delivery, according to data from CME Group.

According to CME Group, the volume of sales for the November US crude oil futures contract rose to 25,615 on Wednesday, which is 10,922 more than the previous session. In contrast, 19,473 call options – bets at a higher price – were bought that day.

“The call has actually shifted in favor of putting after the OPEC decision,” said Bob Yawger, director of energy futures at Mizuho in New York.

According to CME Group data, the volume of inflows on Thursday and Friday was 15,579 and 25,771, respectively, and the volume of calls was 16,087 and 42,291.

Trading rose on Friday after the White House suggested last week that it would review ties with Saudi Arabia and seek ways to loosen OPEC’s control over energy prices.

Crude oil futures spreads widened on Friday, with near-dated contracts rising faster than later-dated contracts. This suggests renewed concern about current supply, which is more bullish.

“There’s a lot of supply uncertainty out to 2023, and let’s not forget there’s 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, and December 2023, rose more than 12% on Friday to more than $13 a barrel, the highest since June, according to data from Refinitiv Eikon.

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

Our standards: Thomson Reuters Trust Principles.

Stephanie Kelly

Thomson Reuters

A New York-based reporter covering the U.S. crude oil market and a member of the energy team since 2018, he covers oil and fuel markets as well as federal policy on renewable fuels.

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