Leveraged products take advantage of recent volatility in oil

This blog was published on 24/10/18 and does not constitute  advice, nor should it be seen as a personal recommendation from Societe Generale.  Information quoted within may be out of date at the time of your reading this blog.

Oil has had a great year with prices soaring and the Bloomberg WTI Crude Oil returning over 30% in the last 12 months. Despite this, since the start of October the oil price has been falling, with the Crude Oil dropping nearly 10%.

Oil is now facing a number of different geopolitical and supply factors

which is increasing volatility in the markets. However, this volatility has been a good opportunity for traders to make a profit on the rise and fall of oil prices – especially when using leveraged trades. 

Source: Bloomberg as of 24/10/18

In fact, in the last few weeks leverage oil Exchange Traded products  have featured in the top ten most traded on the London Stock Exchange by number of trades and volume.

Oil prices are typically impacted by the dynamics of supply and demand. Too much supply and prices go down, to little supply with increased demand and prices go up. 

CNBC reported in October 2018 that the U.S. Energy Information Administration found that U.S. commercial crude stockpiles rose by 6.5 million barrels in the week to 12th October. A Reuters survey of eight analysts also estimated that crude stocks rose by about 2.2 million barrels.
However, there have been various geopolitical tensions that have had the biggest impact on the oil price in recent weeks. Tensions between the US and Saudi following the disappearance and subsequent death of journalist Jamal Khashoggi. 
CNBC in October 2018, reports Jim Ritterbusch, president of Ritterbusch and Associates, saying that Saudi Arabia could cut as much as 500,000 barrels per day of crude production "as a warning shot should the U.S. opt to impose any type of sanction in response to the Khashoggi developments."

Another area with issues is the US and Iran relationship

US sanctions on Iran weigh heavily on the oil complex. President Trump announced in May that the US would leave the nuclear agreement Obama and five other countries negotiated with Iran in 2015 and reimpose sanctions on the country. These are due to come into effect on 4th November. The aim is to cut Iran’s oil exports to zero to force its leaders to change their behaviour in the region, according to a note from Reuters in October 2018.  

There are concerns that the US sanctions over Iran’s crude oil exports will cause a deficit

This is despite OPEC insisting that they are committed to raising output. However, according to The Motley Fool in October 2018, it’s also why President Trump and the head of the International Energy Agency (IEA) have called on OPEC to increase its supplies to keep a lid on prices, which are starting to grow out of hand.

In Venezuela, there are also output issues

The Motley Fool reported that there are increasing concerns about whether producers can continue pumping enough crude to meet demand, especially with output from Venezuela falling while supplies from Iran are also in decline due to U.S. sanctions. Venezuala has cut its exports since 2012 amid a collapsing economy, and supply is expected to continue declining. 

Finally, there is increasing pressure from the shale gas industry. According to Livemint, the rise of US shale oil is set to extend well into the 2020s, stealing market share from the OPEC, the group said in its latest World Oil Outlook. 

“Total supply from outside of the Opec will surge by 8.6 million barrels a day from 2017 to 2023, to 66.1 million barrels a day. This will mainly be driven by increases in US shale oil output, the report said. The estimates from this year’s report are a slight increase from those of the previous year.”

All of this hints at a potential supply crunch in the coming years. 

Remember, as with most investments, the value can go down as well as up, and as a leveraged investment these products are designed for sophisticated investors, so if in doubt, seek advice.

Post by: Zak de Mariveles, Head of UK Exchange Traded Products

Similar Articles:

oil investing volatility crude oil ETPs shale gas OPEC

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