Crude Oil on Going Tug of War Between OPEC Production Cuts and US Shale Increased Supply

WTI Crude Oil has been trading in a fairly tight range over the past 5 sessions as Bulls and Bears try to determine if the OPEC production cuts will outweigh the supply increases from US shale. Since last Monday WTI price has been with a narrow range of $53.25 and $54.25 per barrel.

Reports released last week that Iraq and Saudi Arabia had nearly fully implemented its share of production cuts, together with news that Russia had also cut back stabilized the market. The opposing forces were coming from news of higher rig counts and a sharp increase in Crude Oil stock piles last week of 9.527M barrels, when forecasts had been for in increase around of around 2M.

The market is still expecting to see the full extent of the agreed OPEC cuts, once all countries involved fully comply in reducing their share of supply. We can expect more volatility tomorrow after the API releases its expectations for weekly Crude Oil stocks change at 9:30 pm. The EIA will give its own figures confirming the change on Thursday at 4 pm. Large increases may put pressure on the price of WTI will small increases may help Bulls gain confidence in the effects of the OPEC cuts.

If you think that WTI price may increase over the next week then all you need to do is buy a Call option which gives you the right to buy WTI at a given price (strike), for a certain date (expiry) and set amount.

The screenshot below shows that a WTI Call option with a $54.04 strike, 8 day expiry, and for 50 barrels would cost $42.37, which would also be the maximum risk.

This screenshot shows the profit and loss profile of the above Call option, just click the Scenario button.

On the other hand, if you think that the price of WTI might go down over the next week then all you need to do is buy a Put option, which gives you the right to sell WTI at a set strike, expiry and amount.

The screenshot below shows that a WTI Put option with a $54.04 strike, 8 day expiry, and for 50 barrels would cost $42.39, which would also be the maximum risk.

This screenshot shows the profit and loss profile of the above Put option.