As futures in New York slipped to the lowest since OPEC’s output deal in November, options trading surged and signaled the biggest bias toward a price decline in six weeks. That’s a stark departure from last month, when the West Texas Intermediate benchmark traded at the narrowest price band since 2003.
“We were in such a tight range,” Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors LLC, said by telephone. “There is definitely going to be some volatility put in the options market because you are seeing a bigger movement in price.”
Futures had been trading between about $50 and $55 a barrel this year as the Organization of Petroleum Exporting Countries and 11 other major producers implemented historic supply cuts to help rebalance the market. But shale producers aren’t helping. A drilling revival in regions like the Permian Basin of West Texas and southeastern New Mexico has pushed U.S. crude inventories to record highs, and production topped 9 million barrels a day.
Harold Hamm, the billionaire shale oilman, said at an energy conference in Houston this week that his industry could “kill” the oil market if companies keep increasing spending to boost drilling. Saudi Arabia Oil Minister Khalid Al-Falih said at the conference that it’s premature to discuss an extension to OPEC’s deal. He also said the kingdom wasn’t planning to bear the brunt of balancing the market alone.
WTI for April delivery slumped 2 percent to settle at $49.28 a barrel, the lowest level since November 29. On Wednesday, the U.S. benchmark broke below the 100-day moving average, a key technical level, also for the first time since late November. Futures are down 7.6 percent this week.
Implied volatility — which tends to increase when investors believe prices are set to fall and risk perception is worsening — is on the rise. For so-called 25-delta May WTI put options, contracts that give buyers the right to sell futures at a specific price by a certain date, implied volatility climbed to the highest level since Jan. 24 on Thursday. The skew on the front-month WTI futures, which measures the difference in implied volatility between different types of options, rose to the highest since November.
Growth in U.S. shale output is “one of the reasons as to why people are reluctant to take it long, and ultimately, they got a little weak-kneed,” Bart Melek, the head of global commodity strategy at TD Securities in Toronto, said by telephone. “It’s not surprising that during a period of a short correction, that you would start pricing puts a little bit more aggressively. People who have long outright positions in futures may want to take protection.”
Options on WTI saw 570,934 lots traded as of 5:01 p.m. in New York, set for the second-highest volume ever, according to preliminary data compiled by Bloomberg. WTI crude futures volume was at about 1.57 million on Thursday, following 1.76 million on Wednesday. The most-active WTI options traded Thursday include April $50 calls, April $48 puts, April $51 calls, April $55 calls and April $47 puts.