OPEC Cuts, Oil Surges. What's Next?

OPEC Cuts, Oil Surges. What's Next?

The OPEC deal to not just freeze but cut oil output next year, in concert with non-OPEC producers Russia and Brazil, came as a surprise to many and almost didn't happen. Only time will tell if it goes through, but it sets up 2017 to be the year for trading oil. Do it with limited risk on Nadex.

Oil rigs at sunset |
Oil rigs at sunset | iStock

Crude oil trading in early 2017 looks likely to increase in volume and volatility, continuing this week's rise in interest and prices. With Brent crude topping $50 for the first time in over a year, investors and traders are taking a fresh look not just at buying oil futures and energy stocks, but also using contrarian strategies to trade the inevitable fluctuations along the way. 

The reason some traders avoid crude oil, however, is that the size of the contract and the volatility make it tough for smaller account holders. Margin requirements to trade a single crude oil contract exceed $3000. Options on futures can also be expensive. Beyond that, the wild price fluctuations can mean that a swing can drop or add hundreds or thousands from or to your account in a few minutes. A single tick move of 1 cent per barrel (the minimum increment) is worth $10 per contract. It's no wonder many brokers recommend minimum account balances of 25 to 100,000 dollars. 

A Nadex binary option on crude, by contrast, costs less than $100. It tracks the same underlying market and is based on the same CME® Crude Oil futures contract. But the most you can lose is the amount you paid to enter the trade. No further losses. No margin calls. 

With this new, more affordable way to trade crude oil gaining interest, more traders are looking at the energy markets not just to see how gas prices are going to go, but as trading opportunities they can now realistically add to their portfolios. Among the factors to consider when looking at the OPEC deal are the strong dollar, the 2 am phone call that seal the deal, and the fact that hackers in one OPEC country (Iran) allegedly just did some major mischief to the air transportation and other infrastructure of another member, Saudi Arabia. 

The US dollar is now at multi-year highs against many developed-world currencies and at all-time records versus emerging market currencies. It is now 40% above its 2011 lows. The relevance for oil traders is straightforward: oil is priced in dollars and, for the most part, paid for in dollars. This imbalance between currencies means that the price of oil could see even greater fluctuations than can be explained just by supply and demand. Even a steady supply of oil might be accompanied by wild price swings if the dollar starts dropping or surging. 

It also creates larger security concerns. The strong dollar is beneficial for some countries and companies and a problem for others. Add to this the varying costs of production, from Saudi Arabia's low $15 a barrel cost to the $40 and $50 cost in other countries, and you have a playing field that is more like a minefield. 

When you have a game that's stacked against some of the players, you have a situation where the weaker ones will be looking for ways to get back some of their lost edge. The deal signed this week will only work if everyone sticks to it. But as former Saudi Arabia Oil Minister Ali al-Naimi said at an event in Washington, D.C., "The unfortunate part is we tend to cheat."

Speaking of cheating, in the last two weeks several cyber-attacks believed to have emanated from Iran did damage to Saudi airports and other targets. It is the latest in a two-way cyberwar going back years, including an attack on state-run oil company Saudi Aramco in 2012. There is no reason to think the OPEC deal will end this. With a new US president entering office, Iran may seek to capitalize on any perceived vulnerability. 

The deal almost fell through, until a 2 am phone call from a principal Russian negotiator to his Saudi counterpart led to a breakthrough. The Russians agreed to curb their output to match OPEC, rather than seeking to take advantage of higher prices by selling more. 

However, as al-Naimi said, everyone "tend[s] to cheat." Which, for traders, just means more volatility to take advantage of. Crude oil trading is likely to be a wild ride and lucrative for those who can limit risk and seize opportunity. The built-in risk and reward structure of Nadex binary options and spreads are an innovative way for traders to focus on their trading strategy and on the market's price action, without worrying about unlimited loss potential. Crude oil, perhaps more than most markets, is one where that kind of certainty about maximum risk and reward can be a crucial edge. 

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