Since the IEA intervened in global oil markets back in June, open interest in the Nymex WTI $120 strike call for December 2011 delivery has increased by 12 percent.
This is yet another clear sign that attempts by oil-consuming nations to manufacture lower prices (without addressing long-standing structural constraints in physical cost drivers) has failed miserably.
For instance, from the peak in early May, through June 22nd (the day prior to the IEA’s announcement to dump 60 MMbbls on the market), spot had closed lower in 23 of 37 sessions (62%). More importantly, the average short trade out earned a long trade by a whopping 27%. Thus, by the time the IEA came into the market, oil in New York had already fallen by nearly one quarter.
However, since June 23rd, spot has closed higher in 13 of 23 sessions (57%) and the average long trade has outpaced the short trade by a 6% margin.
As far as the interest in the $120 December call option is concerned, a month ago at-the-money implied volatility priced in approximately an 11% chance of a rise to $120. One month later (post IEA) volatility implies around a 12½% chance of a rise to $120.
As illustrated in today’s issue of , the odds of seeing $120 by the end of the year have shortened over the last month from 8:1 to 7:1.
Bottom line, contrary to the intent of the IEA, the market’s skew has turned in favor of the bulls.
Stephen Schork is the Editor of and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.