Looking at a chart of crude oil over the last year, it's pretty hard to argue that OPEC's coordinated supply cut hasn't worked exactly as planned.
Last summer, the price per barrel on West Texas Intermediate (WTI) was in the $40s. It's now in the $70s. Scoreline: OPEC 1, World 0.
With the United States recently pulling out of the Iran Nuclear Agreement, there's even a chance oil could continue to move higher in the foreseeable future. That all depends on whether OPEC decides to gradually increase supply this summer, or if it keeps production at current levels.
A quick glance at the Crude Oil Volatility Index (OVX), which is essentially like the VIX of oil, confirms the fact that market anxiety relating to the underlying price of oil has steadily decreased since OPEC first announced their agreement in late 2016.
The OVX hit its 5-year peak of about 60 when OPEC was first considering extraordinary measures. Over the last year, the OVX has traded within a tight range right around 30 - much closer to its historical average.
Because volatility in crude oil has been so subdued, a small spike in said volatility can have a bigger impact on Implied Volatility Rank (IV Rank). With OPEC discussing possible changes to their agreement, including a gradual “normalizing” of production, the speed of the oil market has picked up.
As of now, IV Rank in OVX is trading about 60%, which means implied volatility is currently higher than average compared to the last 52-weeks of data. However, we need to keep in mind that the recent 52 weeks have been less volatile, as compared to the 52 weeks before that.
If you are looking to delve further into action in the crude oil market, we think a recent episode of Closing the Gap: Futures Edition is worth a few moments of your time.
On this installment of the show, the hosts provide a comprehensive update on oil prices and oil volatility. They also discuss crude oil options on futures and review recent price data for such options.
Traders looking for new ideas in this space will find plenty of food for thought on the episode, and we hope you’ll take the time to review it in its entirety when your schedule allows.
If you have any questions about crude oil futures, we also encourage you to reach out by leaving a message in the space below, or sending us an email at firstname.lastname@example.org.
We look forward to hearing from you!
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.
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