Uncertainties surrounding the oil market are currently making investors pragmatic and cautious. The global and within that the U.S. economy is slowing down (albeit still expected to grow) thanks to the protracted rise in borrowing costs. The U.S. bank crisis increases anxiety levels of a credit crunch, and the tight U.S. labour market also triggers economic headwinds. In this investment climate it is perhaps not surprising to have seen the CME Group flagship crude oil futures contract, WTI, drop nearly $20/bbl between April 12 and May 04.

The future, however, looks brighter as displayed on the chart. It shows the open interest (OI), the number of open positions in the December 2023 WTI $100 strike call options and $50 strike put options. The graph is somewhat deceptive because of the adjusted scales of the vertical axis. Open interest in call options is meaningfully higher than in put options. In fact, between January and April this year the OI in the $100 strike call option rose by almost 16,000 contracts or 75% whilst the increase in the $50 put option OI was 2,100 contracts or 24%. It paints a sanguine picture towards the end of the current year.

There is a convincing fundamental justification for such an upbeat outlook. The EIA expects U.S. oil demand to rise from 20.19 mbpd in the first half of the year to 20.53 mbpd in 2H of 2023. Although domestic commercial inventories will rise in 3Q 2023 from the incumbent quarter they will finish the year at 1.255 billion bbls, a quarter-on-quarter decline of 32 million bbls. The current sentiment is unreservedly negative. It is reflected in higher put skew meaning that implied volatility is currently more pronounced in put than in call options. This, however, is expected to change in favour of call options as the oil balance tightens going forward. It is not unreasonable to anticipate increasing activity in call options in the second half of the year. Should this occur, trading call spreads, i.e., buying lower strike versus higher strike out-of-the-money call options, potentially offer profit potential whilst limiting downside risk.

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