Crude Oil Volatility Index Spikes as Crude Oil Bounces Off the 7-Year Low, Donít Go Bottom Fishing Yet

Witawat (Ed) Wijaranakula, Ph.D.
Tue Dec 8, 2015

Crude oil futures for delivery in Januaryí16 [CL1.NYM] traded down another 2.94%, to an intraday low of $36.64 per barrel on the New York Mercantile Exchange (NYMEX) on Tuesday, following a 5.57% nosedive on Monday after Friday's announcement by the Organization of the Petroleum Exporting Countries (OPEC) that it had agreed to roll over its policy of maintaining crude production in order to retain market share. According to Reuters, OPEC supply rose in November to 31.77 million barrels per day (bpd) from 31.64 million bpd in October.

The Crude Oil Volatility Index (OVX), traded on the Chicago Board Options Exchange (CBOE), surged 7.43% on Tuesday to an intraday high of 52.64 before pulling back and closed at 50.34, up 2.73% for the day. The OVX is a crude oil derivative which measures the marketís expectation of 30-day volatility of the United States Oil Fund ETF [NYSE:USO], primarily the near month WTI crude oil futures contracts traded on the NYMEX. In short, high OVX readings usually mean traders see significant risks that crude oil price futures will move sharply lower. The spike in OVX readings could signal a crude oil bottom. Nonetheless, the OVX could continue to stay at elevated levels as long as the crude oil glut persists.

The U.S. Energy Information Administration (EIA) said last Wednesday that U.S. commercial crude oil inventories rose to 489.4 million barrels, up 1.2 million barrels in the week ending November 27. Analysts had expected an inventory draw of 668K barrels. Last Friday, Houston-based oilfield services company Baker Hughes Inc. reported the U.S. oil rig count fell another 10 from the previous week to 545 for the week ended December 2, a 66.13% drop from the peak number of 1,609 in October 2014. 

Surprisingly, the EIA data shows that U.S. crude oil field production is just down a mere 4.19% from a record high this summer as the U.S. still produced 9.202 million bpd for the week ended November 27, 2015, compared to a 30-year record high of 9.604 million bpd reported in the week ended July 3, 2015. 

As of December 1, there are 251,057 long positions of light sweet crude oil futures, traded on the New York Mercantile Exchange (NYSE) by managed money or hedge funds, an increase of 996 long positions from the previous week, according to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) each Friday. This is compared to about 171,805 short positions, an increase of 6,852 short positions from the previous week where light sweet crude oil contracts are traded in units of 1,000 barrels. 

Hedge funds continued to increase their net short positions by about 5,856 contracts, as they are betting that the crude oil price could go lower. Fund managers have doubled their short positions since October 13, while they also increased their long positions by more than 20%. 

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