A private survey of oil inventory reveals a surprising increase in crude oil supplies, contrary to expectations for a decrease. According to this survey, there was a draw of 0.6 million barrels of crude oil, a rise of 0.2 million barrels in distillates, and a drop of 1 million barrels in gasoline. This information comes from the American Petroleum Institute (API), which conducts surveys of oil storage facilities and companies. However, the official data from the U.S. government, set to be released on Wednesday, does not align with the private survey results.

EIA Report and Its Importance

The U.S. Energy Information Administration (EIA) will publish government data gathered from the Department of Energy and other agencies. The EIA report provides detailed insights into refinery activities, the state of the crude oil market, and storage levels for different types of crude. It is generally seen as more reliable than the API survey. This difference highlights an area we can capitalize on. The market often gets caught up in numbers from private surveys, which can misrepresent the real situation. While others debate these numbers, we see a chance to benefit. Ultimately, the government’s data is what matters. The disagreement creates doubt and tension leading up to the actual release, which can lead to significant market movements. In the coming weeks, our focus should be on volatility, not direction. The clash between these two reports sets the stage for a price adjustment when the official figures are announced. Currently, the market is uneasy, and uncertainty is advantageous for option traders. The situation is further complicated by the latest OPEC+ meeting, which agreed to extend significant production cuts through 2025, a bullish sign. However, they also plan to gradually end some voluntary cuts later this year, raising questions about future supply. For instance, by early June 2024, U.S. crude stockpiles increased by 1.2 million barrels, surprising a market that expected a 2 million barrel decrease. This kind of volatility can hurt those betting on a specific direction but can be highly rewarding for those prepared for a swift price change.

Strategy for Making Money from Volatility

Historical data shows that the hours before Wednesday morning’s official release are typically the most volatile for WTI. We experienced something similar in spring 2023 when unexpected inventory increases caused WTI prices to drop from the mid-$80s to the high-$60s in just a few weeks. Those who anticipated a large price move, regardless of its direction, were better protected from the turmoil. As a result, our strategy should center on buying volatility. We are considering simple long straddles or strangles on front-month crude futures. This approach allows us to benefit from significant price movements, whether up or down, that will inevitably follow the government data release. Instead of trying to predict the inventory number, we’re betting that the current confusion will lead to a sharp resolution. The premium we pay for these options is worth it for a likely volatility event. We plan to enter these positions while implied volatility is reasonable, before the official release, and then take advantage of the immediate price adjustments that follow. Create your live VT Markets account and start trading now.

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