Monday, May 25th, 2020

Can You Make Money with Oil Options?


Nearly a year ago we suggested that you can make money with oil futures options. It turns out this advice was correct. If you had purchased puts on crude oil futures or stocks in the oil sector in July you would have made money between then and now. But, can you still make money with oil options? The Wall Street Journal reports that oil prices rise as traders wait for supply reports.

Oil prices rose Tuesday, paring earlier losses, on expectations that growing U.S. production and crude stockpiles are both near their peaks. Light, sweet crude for May delivery recently rose 24 cents, or 0.5%, to $52.38 a barrel on the New York Mercantile Exchange. Brent, the global benchmark, traded down 5 cents, or 0.1%, at $58.07 a barrel on ICE Futures Europe. Prices fell in early trading as the dollar strengthened against a basket of other currencies. Oil is traded in dollars, and a stronger dollar makes oil less affordable to buyers using foreign currencies. However, prices erased those losses and moved higher as traders focused on upcoming inventory data.

Inventories are high and economies across the world are weak. Nevertheless the Saudis are raising their prices for Asian customers. Can you make money with oil options? You can if there is enough market volatility.

Oil Price Determinants

USA Today asks what determines if oil prices go up or down. If you get this part right you can make money with oil options.

It appears as if oil prices could be on the verge of a rebound, with new data showing that the U.S. oil patch is hitting an inflection point. While specific shale regions – such as North Dakota’s Bakken and Texas’ Eagle Ford – have posted production declines, overall U.S. oil output managed to edge up in recent months.

But now that U.S. production has finally dipped, it may augur a new phase for oil markets in which production cutbacks could lead to higher prices. The Energy Information Administration reported on April 1 that total U.S. oil production fell for the week ending on March 27, falling 36,000 barrels per day to 9.38 million barrels per day.

The prior week’s production level of 9.42 million barrels per day was the highest level in three decades. If output continues to decline, mid-March 2015 could mark the peak of U.S. oil output, at least for the foreseeable future.

Because the price of oil is low oil exploration has dropped off and eventually so will US production. This will lead to higher oil prices. However, Iran may start exporting oil again if talks regarding their nuclear aspirations succeed. That would create a greater glut in the oil market and lower prices. Can you make money with oil options? You can if you can see how these factors play out.

When Iran Starts Exporting Again

Reuters predicts a long bear market in oil as Iran gets ready to export.

Ultimately, a fully rehabilitated Iran could help bring stable and relatively high oil prices. But the wait following an April 2 framework agreement on Iran’s nuclear programs is likely to be long. And between now and then, the predominant direction of pressure on the oil price is likely to be downward.

The stability hypothesis is simple. At some point, Saudi Arabia, Iran and some other producers will make commercial peace and defend a new equilibrium price. It will probably be below the too-generous $110 a barrel which prevailed from 2011 to mid-2014. But it will be well above the minimum needed to keep the world supplied for a long time, something like $30 per barrel.

Between now and then, though, much has to happen. The deal has to be fleshed out and put into effect. Iranian oil production must increase, and wasteful domestic consumption, which BP’s Statistical Review of World Energy shows is currently running at about half of total production, must fall.

It remains to be seen if arch enemies Iran and Saudi Arabia will be able to work together to control the price of oil. But in the meantime you can probably make money with oil options by betting on continued low prices.

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