Bloomberg: Five Oil Signals to Watch in 2018

Oil traders are going to have their work cut out in 2018.

1. The Shale Signal

2. OPEC’s Bellwether

Brent crude surged into a bullish, backwardated structure this year as OPEC-led output cuts tightened global supplies. December 2018 futures climbed to their highest premium ever versus the same month for 2019 this week, and the spread may expand further as OPEC’s cuts drive the oil market toward balance next year, according to Abhishek Deshpande, head of oil research at JPMorgan Chase & Co. “We are more comfortable with a balanced market to take a view of going long that spread,” said Deshpande.

3. Lottery Tickets

With geopolitical risks flaring in a host of major oil producers, funds have been busy snapping up bullish oil options contracts that would profit from a sharp spike in crude prices. The December 2018 $100 call remains the most-held Brent options contract, while $80 calls equating to more than 30 million barrels for the latter part of next year traded in recent weeks. Venezuela, Iran and Saudi Arabia top the list of countries that could see oil-related disruptions in 2018, RBC Capital Markets LLC analysts including Helima Croft wrote earlier this month.

4. Volatility Vacuum

Despite those risks, volatility has plunged to the lowest in more than three years in recent weeks as a steady grind higher in prices took some of the fizz out of the oil market. With the Organization of Petroleum Exporting Countries clearly signposting its plans for 2018, banks including Societe Generale SA expect to see a continued slide in volatility next year. “OPEC’s decision to proactively manage the market is going to keep volatility flat as a pancake,” Amrita Sen, chief oil market analyst at Energy Aspects Ltd., wrote earlier this month.

5. How Long?

The market is heading into 2018 near a record number of bullish bets in Brent and WTI combined, exchange data show. Those contracts, which now outstrip bearish ones by seven to one, have led to concerns that crude may soon see a speculator-driven slump. That bullish positioning has been “the largest bearish cross in my scorecards for the last several weeks,” said Torbjorn Kjus, chief oil analyst at DNB Bank ASA. What’s difficult is that “we don’t know the type of players. If they want to have a larger part of their assets in commodities for the next couple of years, then they’re not going to sell those positions.”