Unusual Options Activity in Energy Ahead of 2M OPEC+ Production Cut

On Saturday, news broke that OPEC+ would soon consider a production cut of over 1 million barrels per day. Though it isn’t their first production cut in 2022, it’s their most substantial by far.

Justin Nugent

This article was last updated on 10/05/2022.

OPEC, OPEC+, Oil, OPEC Cut, Energy Prices, Oil Prices, 1 million barrels per day

Last month, on September 5th, energy prices had been falling for several weeks straight. In an effort to put pressure on the wound, OPEC+ cut production by 100,000 barrels per day. This helped a bit, initially spiking the price of Crude by more than 3% following the announcement. However, it’s worth noting that this was a tiny cut. For comparison, OPEC+ produces roughly 28 million barrels per day. Saudi Arabia alone produces roughly 10 million barrels per day. So when OPEC+ says they’re going to cut production by 100,000 barrels per day, they’re saying “We’re going to cut production by 0.36% of our daily output.” That isn’t great news, but it isn’t a huge deal. It makes sense that after a small bounce, energy prices continued to fall following that news. Nothing significant had changed. However, energy prices are powering back up again today, and this time, the rally may not be so short-lived.

What is OPEC+? What is OPEC?

OPEC, or the “Organization of the Petroleum Exporting Countries,” was founded in 1960 in Baghdad, Iraq. The founding nations were Iran, Iraq, Kuwait, Venezuela and Saudi Arabia. Today, the OPEC consists of 13 nations:

  • Algeria
  • Angola
  • Republic of the Congo
  • Equatorial Guinea
  • Gabon
  • Iran
  • Iraq
  • Kuwait
  • Libya
  • Nigeria
  • Saudi Arabia
  • United Arab Emirates
  • Venezuela

_

Ecuador, Indonesia, and Qatar used to be OPEC members, however all three officially exited OPEC between 2016 and 2020. 

Additionally, 10 more countries are affiliated with OPEC, though they are not members:

  • Russia
  • Kazakhstan
  • Azerbaijan
  • Mexico
  • Oman
  • Bahrain
  • Brunei
  • South Sudan
  • Sudan
  • Malaysia

_

Combined with the 13 members of OPEC, these 23 countries form OPEC+. 

OPEC began as, and is arguably still, a cartel. 

OPEC, OPEC+, Oil, OPEC Cut, Energy Prices, Oil Prices, 1 million barrels per day
Source: Google, Oxford Languages

Not in the violent sense of the word that many of us think of when we hear “cartel” — although, many of these countries have fought their fair share of battles and spilled their fair share of blood over black gold, we’re speaking specifically about the dictionary definition of the word. OPEC+ is an association of manufacturers and suppliers of oil who share a combined goal of putting a floor on oil prices. The caveat here is that OPEC+ cannot raise prices to such an extent that it no longer makes them a viable source for the world’s oil consumption. After all, there’s one country that produces more oil than Saudi Arabia, and that country isn’t in OPEC+.

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OPEC, OPEC+, Oil, OPEC Cut, Energy Prices, Oil Prices, 1 million barrels per day
Many don’t know that the United States produces more oil than any other country in the world. Source: Statista, Nasdaq.

As a rule, OPEC+ would prefer to make as much money as possible off of the production and sale of oil without jeopardizing their market share. That’s why OPEC+ is making yet another move to once again tighten the supply of oil.

OPEC+ Gets Serious About Putting a Floor on the Price of Oil

This weekend, OPEC announced it will be holding its first in-person meeting since the outbreak of Covid-19. The meeting will be held on Wednesday, October 5th, in Vienna, Austria. Though the agreement won’t be set in stone until the meeting commences, sources close to the matter say that the outcome will likely be a supply cut of more than 1 million barrels per day

That would be the largest since May of 2020 (when OPEC cut production by 10M barrels per day), and one that is 10X larger than the supply cut made just one month ago. Combined with the September supply cut, this could mean a total reduction amounting to nearly 4% less oil produced by OPEC per day.

Aside from working for the benefit of its member countries, there’s another constituent mentioned in OPEC’s declaration of cooperation: Investors. While OPEC’s reduction in the supply of oil won’t help cast-strapped consumers across the globe as they enter what some expect to be a particularly harsh winter (especially with electricity prices rising), it will help energy investors and traders. This likely explains the heavy amount of unusual options activity that Market Rebellion has identified in energy over the past week.

OCTOBER 5TH UPDATE: OPEC+ HAS AGREED TO CUT PRODUCTION OF OIL BY 2M BARRELS PER DAY, THE BIGGEST CUT SINCE COVID BEGAN. ENERGY STOCKS TRADING SIGNIFICANTLY HIGHER ON THE NEWS, CONTINUING RALLY FROM MONDAY AND TUESDAY.

Bullish Unusual Options Activity in Energy

unusual options activity, UOA, energy
Source: Market Rebellion’s unusual options activity

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When we identify unusual options activity, we’re searching for a few things:

  • How big is the delta? Put another way, how much of a dollar move do these buyers expect out of this name? 
  • Repeated activity. In this case, 12 big bullish trades made over 5 trading days, all in the same sector is enough to raise our eyebrows.
  • Timeframe — what timeframe do these buyers expect a move in? In this case, we’re seeing everything from October 7th weekly options all the way out to January 2024 diagonal spreads in OXY. 
  • Volume vs. open interest. When we see something like 2,500 call spreads in MUR against open interest of 31 and 20, that’s a big discrepancy indicating that this the trader it taking out a new position. The same phenomenon occurs across the board in these trades, but especially in SPWR and MRO.
  • How far in or out-of-the-money are the options? Notice: All 12 of these bullish purchases are out-of-the-money. When trading long options, out-of-the-money predictions require not just directional correctness, but expedited directional correctness. It isn’t just enough to be right about a stock going up, it needs to outrun theta decay.
  • Total dollar amount. Above everything else, we want to see the trader put their money where their mouth is. Trades like the Marathon Oil bullish combo stand out immediately: 15,423 calls bought for a total trade value of $3,716,943 are already notable. Combine the sale of 15,423 puts at the $21 strike for $2.00 in premium (total collateral required: $29,303,700) and you have a trade that required more than $33M to finance. And that’s just one of twelve massive trades made over the past five trading days in the same sector. 

unusual options activity

The Bottom Line: When you look at the combination of factors, it’s clear: Traders (who likely come from an institution or institutions) are getting very bullish on the energy sector. It makes a lot of sense. With OPEC+ working to put a floor under commodity prices, a massive supply/demand imbalance, and a cold winter looming, there are a lot of bullish factors that line up for the energy sector. 

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