Oil prices dropped for the third day in a row on Friday as traders looked ahead to an OPEC+ meeting. This meeting, which includes eight OPEC nations and partners like Russia, will discuss possibly raising production in October. The proposed production increase aims to reverse part of the 1.65 million barrels per day cut, which accounts for about 1.6% of global demand and is set to happen over a year earlier than planned.

U.S. Crude Inventory and Its Market Impact

The market also reacted to an unexpected rise in U.S. crude inventories, which increased by 2.4 million barrels last week. This was contrary to the expected decrease of 2 million barrels, as refineries went into maintenance mode. Meanwhile, the API reported a smaller increase of about 600,000 barrels. We are closely monitoring the OPEC+ meeting this weekend. A decision to raise production by 1.65 million barrels per day could push prices down heading into October. The uncertainty before this significant policy announcement creates chances for volatility-focused trades. The market reflects this, as implied volatility for front-month WTI options has jumped to a six-week high of 39%, showing nerves about potential price shifts. Given the pivotal nature of the weekend’s decision, traders are preparing for price swings using options strangles. A surprise to keep production steady could lead to a sharp price rally, while an expected increase might speed up the current decline. Recently, we saw similar spikes in volatility around late 2023 OPEC+ meetings when the group struggled to reach consensus on production cuts. The unexpected 2.4-million-barrel build in U.S. crude inventories signals bearish trends in the short term. Data from the Energy Information Administration (EIA) shows that refinery utilization has dropped from 93.1% to 89.5% nationwide, highlighting that fall maintenance is fully underway. This decrease in domestic crude demand is likely to last for several more weeks.

Market Strategy and Outlook

This short-term supply surplus is weighing on the futures market, and we are observing a possible shift to a deeper contango, where near-term prices are lower than future prices. This scenario benefits traders who set up calendar spread positions, such as selling the October contract while buying the December contract. This strategy profits if the price difference between the two months widens due to immediate oversupply. With both the potential for OPEC+ to increase supply and confirmed weaker U.S. refinery demand, the path forward seems downward in the coming weeks. We are considering buying put options with strike prices near $70 for October expiration on WTI, currently trading around $76.50 per barrel. This provides a defined-risk strategy to profit from a possible decline driven by these bearish factors. Create your live VT Markets account and start trading now.

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