Oil Volatility Here to Stay Regardless of OPEC Decision

By Inyoung Hwang and Jonathan Morgan  

Photographer: Derick E. Hingle/Bloomberg

A drilling rig barge is seen in this aerial photo taken over the coast of Louisiana,... Read More

Whatever the outcome of tomorrow’s OPEC meeting, options traders are betting on oil-price swings.
That’s because the decision from the Organization of Petroleum Exporting Countries isn’t likely to make much difference. Slowing global demand and a U.S. shale-drilling boom has created a glut that won’t fade any time soon, said Torbjoern Kjus of DNB ASA in Norway.
Half of analysts surveyed by Bloomberg expect a cut in production at the meeting in Vienna tomorrow; the rest don’t see a deviation from OPEC’s 30 million barrel-a-day target. Yet an index tracking expectations for moves in oil prices reached the highest ever versus a gauge that measures equity volatility, according to data compiled by Bloomberg going back to May 2007.
“We are still talking about a market that is 2-million barrels-a-day oversupplied in
the first half of next year,” said Kjus, a senior oil market analyst at DNB. “Even if OPEC delivers on net production cuts, we don’t think that will be enough. We are not talking enough to turn this market around.”
The Chicago Board Options Exchange Crude Oil Volatility Index, which tracks the cost of options on an exchange-traded fund tracking the commodity, has more than doubled from a low this year in June. The CBOE Volatility Index measuring options prices on the Standard & Poor’s 500 Index has advanced 14 percent in the same period.

Bear Market

Oil has tumbled into a bear market, fueled by supply gains from U.S. production reaching a three-decade high. Brent, which peaked around $115 a barrel on June 19, has plunged as much as 32 percent this year. Markets are oversupplied by about 2 million barrels a day, former Qatari Oil Minister Abdullah Bin Hamad Al Attiyah, who participated in OPEC’s policy meetings from 1992 to 2011, has said. Saudi Arabia’s oil minister said tumbling crude prices will stabilize and there’s no need for producing nations to cut output.
Meanwhile, equities are rising. Signs the U.S. economy is improving and additional stimulus measures from central banks in Europe, China and Japan have helped the S&P 500 reach a record.
Oil producers have been hedging against a drop in prices, said Antoine Porcheret, an equity and commodity derivatives strategist at BNP Paribas SA in London. Dealers have been short oil volatility below what he calls key technical support levels -- Brent at $90 a barrel and WTI at $85.

No Appetite

“At these levels, there’s no appetite to bite,” Porcheret said, referring to short-term contracts. “Whether OPEC cuts production or not, there is a high probability for front-month volatility to drop after the meeting.”
The CBOE oil gauge hasn’t swung more than 5 percent since Nov. 13. BNP Paribas forecasts OPEC will reduce production by as much as 1.5 million barrels.
While Saudi Arabia, OPEC’s biggest member, may shoulder the majority of the cut, the U.S. shale industry may push output higher in 2015, according to Virendra Chauhan of Energy Aspects Ltd. in London.
“It is going to be very difficulty to bring on several OPEC members and get them to work in unison,” said Chauhan, a analyst at Energy Aspects. “The market may sell off regardless of the outcome of the meeting.”