Video

Dembik Christopher
Outrageous Predictions 2017 is out! As systemic crisis threatens Europe, the EU steps in with some good old-fashioned Keynesian-style stimulus through a EU mutual bonds issue to the tune of €1 trillion.
Article / 27 September 2016 at 9:18 GMT

Oil market taken hostage by soundbites from Algiers

Head of Commodity Strategy / Saxo Bank
Denmark
  • Oil markets volatile in run-up to Algiers summit
  • Saudis offers cutback in exchange for Iranian freeze
  • Tehran less dependent on crude revenues than Riyadh

Algiers
All eyes are on Algiers as the battle for an oil deal rages on 
ahead of tomorrow's summit. Photo: IStock
 
By Ole Hansen

Crude oil continues to whipsaw as the informal meeting between Opec members in Algiers on Wednesday approaches. Hopes of a deal have been rising and falling during the past week and the almost binary nature of the outcome has triggered rising volatility with call options seeing the biggest demand. 

Saudi Arabia has offered to cut production back to January levels in exchange for Iran freezing production at current levels. Iran produced in the region of 3.6 million barrels/day in July and August. In response to this, Iranian oil chief Bijan Namdar Zanganeh has said that Iran is not looking for a deal to be made in Algiers as it is not willing to freeze oil output before reaching a market share of 12% to 13%, or more than 4m b/d.

Iran's dependency of oil revenues as a share of its national budget is much lower than Saudi Arabia's. On this basis,  Iran is negotiating from a stronger position than the Saudis where deep cuts are being introduced to rein in spending amid an oil price slump which undoubtedly has lasted much longer than expected. 

The oil market has well and truly once again been taken hostage to soundbites from major oil producers. The chance of a deal seems to be fading once again and with that, there comes the risk of markets turning their attention to the continued overproduction and overhang of supply. 

Saudi Arabia has even been reported as saying that the differences between the Kingdom and rival Iran remains too wide to secure a deal. 

Money managers increased gross short positions in futures market by 50% during the week to September 20 and this left the net-long at the lowest level since July. During the same time, the options market has seen increased demand for call options as a potential hedge to protect the upside from a deal. 

With the latest news from Algiers, call options could be hit once the market opens in earnest later today. 

Oil skew



















The top 10 most traded options strikes during the past five days up until yesterday shows the above trend with the three most popular strikes during this time all being calls. Not least the $50 strike expiring on October 17. Also the December $60 call has received heightened attention. 

Top ten most traded options strikes
 
With a "no deal" outcome the market is once again at risk of having to test the strength of support. A face-saving white rabbit can still be pulled from the hat, but failure is likely to attract renewed selling. Not least considering recent developments with rising production from Nigeria, Libya and Russia. 

Adding to this we have the expectation of rising US inventories over the coming weeks as the technical down adjustment last week begins to fade. 

A "no deal" without offering the opportunity of a fresh look at the November Opec meeting could see Brent crude oil challenge support at $45/barrel with a break below signalling the potential of a technical extension towards $40/b.

Brent Crude oil, first month cont.

Create your own charts with SaxoTraderGO click here to learn more

Source: Saxo Bank 
 

— Edited by Michael McKenna

Ole Hansen is head of commodity strategy at Saxo Bank

Relevant articles for you

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Tradingfloor.com permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Tradingfloor.com and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Tradingfloor.com is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Tradingfloor.com or as a result of the use of the Tradingfloor.com. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through Tradingfloor.com your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. Tradingfloor.com does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail