Volatile as always, the United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, is lower by 2% this week, but the benchmark oil exchange-traded product is luring some elevated options activity.
Oil’s demise has been the result of a number of occurrences. On Tuesday, the API reported a surprise crude oil inventory build of nearly 4 million barrels, jolting markets that had just seen massive increases on earlier news that the United States was pushing back tariffs for some of the items anticipated to go into effect at the beginning of September.
Amid volatility in the oil patch, options traders are implementing some interesting strategies with USO.
“USO has seen 42,000 calls and 37,000 puts cross the tape, exceeding its average intraday volume of roughly 22,000 calls and 26,000 puts,” according to Schaefer’s Investment Research. “Most of the action transpired at the January 2020 11.50 strike, where symmetrical blocks of 30,000 calls and puts traded out of the gate. It seems the trader bought the calls for $1.15 each, and the puts for $0.78, resulting in a net debit of $1.93 per spread, or $5.79 million total ($1.93 x 100 shares per contract x 30,000 spreads).”
Crude Calls Waiting
Looking ahead, fundamentals are improving. The International Energy Agency projects consumption to increase each quarter of 2019 year-over-year, albeit at a slower-than-usual pace for the first quarter. Meanwhile, on the supply side, Saudi Arabia and other members of the Organization of Petroleum Exporting Countries have been cutting output. Additionally, U.S. sanctions on Iran and Venezuela have reduced further bets on international supplies. However, slowing economic growth would likely restrain oil demand heading into 2020.
Current OPEC compliance with production cut plans remains above their historical average, and it usually takes between two to three quarters for inventories to normalize after the cuts. While demand has yet to catch up to elevated supplies, rebounding economies in Europe and steady economic growth in the U.S. could prompt more upside for oil this year.
USO needs to notch some more movement to make the aforementioned options trade profitable. Currently, the fund resides 28% below its 52-week high and almost 27% above its 52-week low.
“Looking at the charts, the oil fund will need to break out of its recent trading range — and head for new 2019 highs or lows — in order for the straddle to profit. Since gapping lower in mid-May, USO has bounced around between support in the $10.50 region and resistance at $12.60,” said Schaeffer’s.
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