How OPEC’s Production Decision Tomorrow Could Affect Oil Prices
If you are an energy trader, tomorrow will be a big day for you. While it’s also a big day for the rest of the country, which will be celebrating Thanksgiving Day, for many in the oil patch looking for direction on oil prices, it’s also the day the Organization of the Petroleum Exporting Countries (OPEC), aka the “oil cartel,” will decide whether to cut production.
A major cut of at least one million barrels per day could send oil prices for West Texas Intermediate (WTI) and Brent crude gushing higher—or, at the very least, preventing them from falling further towards the threatening $70.00 level. On the other hand, a non-move by OPEC could see oil prices plummet toward $70.00.
Some pundits are even suggesting oil prices could fall to $60.00 per barrel if the status quo is allowed to continue, given the current supply/demand imbalance. The reality is that the massive outputs of oil from the shale formations in North Dakota and Montana have not been met with stronger domestic demand from users. This has led to excess supply and subsequent downward pressure on oil prices.
We also have the massive production ready to flow from the Tar Sands in Alberta, Canada to refineries in Texas and Louisiana. The Keystone pipeline has yet to be approved, however, despite the Republicans recently assuming control of both the House and Senate.
The reality is that the low oil prices may be a boost to companies and consumers, but it’s a financial drain on the oil producers at current prices.
The Situation Among Oil Producers
The feeling is that many OPEC and non-OPEC countries need much higher oil prices at more than $80.00 or $90.00 per barrel to just break even. That’s why the biggest and most influential member of OPEC, Saudi Arabia, is being pressured to agree to cut oil production tomorrow. Recall that Saudi Arabia also recently agreed to sell oil cheaper to the United States, perhaps as a thank you for the country’s help in combating ISIS in Turkey and Iraq.
For oil prices to rally, there needs to be a production cut. The global demand is simply not there, considering the stalling in China, Japan, Asia, Europe, and other regions of the global economy.
So what OPEC decides to do tomorrow will determine which direction oil prices will move.
The Investment Opportunity…
As a trader, you know oil could either surge or plummet in the near-term, depending on the decision.
An option strategy you can use for this trade is initiating a long straddle on an oil exchange-traded fund (ETF), such as the United States Oil ETF (USO). This two-legged option trade simply entails buying a call option coupled with a put option at the same strike price and expiry. At this time, you would be looking at the December expiry. The success of the trade requires a big move in either direction that is enough to recoup the premium you put forth to establish the trade.