September 4, 2024
Interesting. WTI options pricing today has become consistent with about 40% probability of sub $65 expiry in the Dec-24 contract (CLZ4 closed at $69.04 on 9/3). Premia were implying closer to 20% a week ago. Brings the consensus assessment of price risk at that tenor in line with our own.
$65 is an important strike to monitor because that price level is closest to the marginal cost of capex in U.S. Midcontinent drilling. It’s a key price threshold in the economics of producer hedging.
Our read of the NYM WTI oil vol surface is "recession" by year end is still assigned only a 5% probability by that options market. This in turn suggests “recession” as a word/concept may not be so helpful in framing risk for investors here.
We closely analyze the interplay between fundamental and technical factors and physical and paper prices. The anxiety that has washed through oil derivatives in the past few days might be better described as "event risk" (to use a neutral term that might describe U.S. labor conditions and/or OPEC+ policy) or "financial crisis risk" (to use a charged term with broader implications for credit and equities) or “hard landing risk” (to widen the macro tent further). Reasonable observers can and do have different opinions on the likelihood of various scenarios.
With respect to oil, this also seems noteworthy to point out: it was Reuters that reported (on the Fri of the US Labor Day weekend) OPEC+ had committed to pursuing its planned production restarts as of Oct 1. And here it is Reuters today reporting that a postponement of planned restarts is highly likely.
https://blinks.bloomberg.com/news/stories/SJAAVVDWX2PSNEWS OPEC+ discussing postponing planned increase in oil output as of October - sources
Maintain your skepticism about the origin and motives of trial balloons in the media.
Here’s been the reality throughout: (1) OPEC+ announced in June its remarkably detailed production restart plan to have a transparent option on the table if/when demand and price start to advance to uncomfortably high levels (or supply gets lost in war), but that plan was always expressly conditional on demand and price, (2) since early July, neither demand nor price has supported restart on the timetable or in the volumes in the plan, (3) the question for investors is whether you believe MBS will allow or deliberately engineer a tanking in crude oil prices in 4Q2024, (4) the market turmoil of Friday through today has seasonal elements too, but in any case now gives OPEC+ the excuse to mitigate or outright postpone the planned production restart, (5) if OPEC+ elects to mitigate or postpone relative to plan, that choice constitutes an incremental price defense around $70 WTI.
Meanwhile, there are still two weeks till Sep 18 FOMC and any incremental crude oil loadings for Oct delivery are already starting to be in play.
This logic begs a question: if global markets continue to convulse, does OPEC+ or FOMC speak first?
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