Is Oil Implied Volatility Set to Surge on OPEC+, Automotive Revolution?
Could we see dramatically higher implied volatility in crude oil options in the coming months? In Q2 2025, OPEC+ will have to revisit its production cuts, which have taken 3.5 million barrels of oil per day off the market, costing them market share (Figure 1). This decision will come amid relatively weak demand resulting from an accelerating revolution in automotive technology, soft economic growth in China and increasing supply from the U.S.
Figure 1: OPEC has cut production by 3.5 million barrels per day but will the cuts last?
In the mid-1980s and mid-2010s when OPEC opted for increased output, oil prices fell by 67-75%. It’s not clear that increasing production by perhaps one million to three million barrels per day could have such a dramatic impact on prices this time around, but the potential for volatility, and in particular downside price moves, may be elevated. Moreover, the scale of price declines that followed production increases in the mid-1980s and mid-2010 might lead OPEC to conclude that increased market share isn’t worth the potential drop in the price of oil.
Low Implied Volatility and Neutral Skew Ahead of a Major Decision Point
As of late February, CME’s CVOL on WTI – a comprehensive measure of implied volatility – was near historic lows, suggesting that any increase in volatility may come as a surprise to many traders who have grown accustomed to a rangebound market (Figure 2). Moreover, the skew of volatility – implied volatility across different strike prices – has been relatively neutral, suggesting that out-of-the-money put options are not particularly expensive relative to out-of-the-money call options (Figure 3).
Figure 2: WTI CVOL shows implied volatility on crude options is historically inexpensive.
Figure 3: The skew on crude oil options is relatively neutral at the moment
