Oil down almost $5 bbl in just 2 weeks and currently trading below the post OPEC/NOPEC deal. Options volatility (implied vols) moved higher on the price pullback. While producer (commercial) hedging has not been intense, especially as could be expected out of the US, there is now confirmation that Mexico’s PEMEX hedged a sizable clip. Current market conditions are unattractive for producer structures due to the (1) delta impact with lower prices, (2) relatively high volatility and (3) reduced relative gain from hedging via put spreads.

The heavy selling and volatility Wednesday was driven by the front of the curve technical positioning. Gasoline again proved to be a good “leading indicator” for crude flat price direction, as we have pointed out previously. Implied volatility was higher as would be expected but the very front spreads kept firm.

The oil price is $6+ bbl higher from recent intraday low in only a few trading sessions. The long positioning “washout” appears to be behind us and the market perception is of a clear short-term bottom. Net buying is back from the “spec” community as the coming weeks should see supportive fundamentals, continued geopolitical concerns and market expectations of an extension of the OPEC/NOPEC deal (with a rollover of existing terms). The return of hedging volumes from US producers could remain a near term overhang.

Oil prices higher as geopolitical risk is putting $1 or so premium to price. This has not been the case for long. The consequences are unclear as Syria’s oil is globally insignificant.

A lot has happened in crude oil, it feels right to do a status check on major points:
(1) Price action (2) Fundamentals (3) Positioning and flows.
The takeaway is that oil prices have found a floor, the short-term looks oversold and deal extension to cuts seems highly probable. The net result is risk skewed for a flat price move higher with strong implications for option volatility and producer type structures.