Why Crude Oil Traders are Focusing on the Short-Term

While large price changes in crude oil can come at any time the market is open, potential price moves associated with known events and planned news releases has grown, yielding increased demand for risk management around specific calendar days.   

When OPEC+ announced a surprise cut, crude oil prices jumped $4.75 per barrel, making April 3 the largest daily price change in the second quarter of 2023. Prior to 2020, OPEC’s ministerial chiefs met only twice a year, limiting the potential impact from an OPEC action to these few key moments. But 2020 kicked off an era of active supply management: in the last few years OPEC has been meeting as frequently as 10 times annually. These frequent, scheduled meetings can drive over 1 million barrels per day in production shifts, increasing the likelihood of large price moves, and adding more short-term event risk for traders to manage.     

While OPEC is king for oil supply events, so is the economy for demand. Economic expectations have been more in question than usual for the last few years with an escalation in central bank tightening and markets emerging in varying degrees from COVID-19. Since 2022, the oil price change on days when the Federal Reserve announces interest rate decisions has been 40% higher than the daily average. Fed decisions are typically issued every six weeks on Wednesdays, coinciding with the release schedule for the Energy Information Administration (EIA) weekly petroleum data. Scheduled U.S. and Chinese government economic statistics spanning from inflation to jobs to manufacturing activity all also contribute to event risk as the market implies their impact on demand or potential response by the Fed. 

WTI weekly options typically have a lower premium than their monthly equivalent. As interest rates have risen – and with it the cost of capital – capital efficiency is of growing importance. A lower premium on a weekly option makes it less costly for traders to use options to take a directional view on the market, hedge a position, or express a point of view on volatility shifts. Using  call or put spreads on weekly options is another strategy traders use to reduce premium and increase return on capital. Since a spread trade involves two puts or two calls, the growth in use of spreads also contributes to growth in weekly options volume. 

The oil market’s higher levels of volatility, increased event risk and the rising cost of capital are all contributing to growth in WTI crude oil weekly options trading.

But crude oil weekly options aren’t only useful for traders. Analysts, strategists and market commentators benefit from the increased price transparency created by more granular volatility measures. By evaluating the differences in implied volatility across Monday, Wednesday, and Friday expiries, watchers can determine more precisely what kind of price move the market is expecting around certain events or within short time periods.   

As high volatility, high interest rates, and sensitivity to key events persist, WTI crude oil weekly options could continue to grow in popularity.