Shrinking Inventories Lends Support to Oil Prices

Crude oil prices have remained lacklustre and rangebound in 2024. Slow economic growth and abundant production have kept prices muted. OPEC's efforts of supply cuts haven’t helped. Neither have geopolitical tensions.

Over the past two weeks, oil prices have once more started to pick up steam, supported by trend of shrinking inventory. Despite the price buoyancy, we expect prices to remain rangebound with supply and demand in balance.

Yet even during these periods, positioning tactically can allow traders to harness positive gains. This paper posits a calendar spread in CME Crude Oil futures which provides a reward to risk ratio of 1.3x while remaining directionally neutral.


While price, the options skew and IV may not reflect it, geo-political risk for oil supply has not dissipated. Geopolitics remains tense with the conflict in Ukraine and the middle east showing no signs of ending anytime soon. Cease-fire negotiations are stuck in a stalemate. Houthi rebels continue to target ships passing through the Red Sea.

Conflicts are dragging on. The risk of escalation remains high.

Earlier this year, Ukrainian drone attacks on Russian refineries reportedly destroyed approximately 12% of Russia’s total oil processing capacity. According to analysts, continued disruptions and attacks on Russian oil infrastructure is likely to pressure Russian production and exports.

Confluence of these risk factors suggests the potential for upside risk in oil prices. Yet, IV does not reflect this sentiment. CVOL index for CME Crude Oil options is at a four-year low and skew is close to zero suggesting demand for call options remains subdued.

Source - CME CVOL

It is difficult to establish a directional stance based on geopolitical risks given the fragile situation.


Towards the end of January, a divergence in crude inventories & gasoline stockpiles started to emerge. US crude inventories saw large buildups while refined oil inventories had large drawdowns.

This suggested that while demand for crude products was strong, seasonal refinery outages meant demand for crude oil was subdued. The refinery outages were exacerbated by the cold blast in January which led to unplanned shutdowns. The impact – excessive buildup of crude inventories which led to bearish prices.

At the same time, inventories of refined crude products like gasoline showed that demand at the downstream has remained strong. Gasoline inventories have fallen sharply over the past month and stand near their 5-year lows.

Data Source - EIA

Over the past month, though, refineries have come back online much faster than anticipated. Refinery utilization rate has surged from 80% in early Feb to almost 88% as of 15/March.

Data Source - EIA

Increase in refinery utilization has provided much needed demand for crude oil. Crude oil inventories have shifted from their huge buildups to drawdowns over the past week.

At the same time, gasoline inventories continue to decline at a rapid pace suggesting strong fuel demand.

Data Source - EIA

In EIA’s weekly petroleum status report for the week ending 15/March, crude inventories fell more than expected (2 million barrels vs 900k barrels expected). The reason for the surprise – higher exports and refinery activity. This suggests that the demand for crude oil in the near term is stronger than many expected after the huge buildups in Feb.


At the meeting on 3/March, OPEC announced the extension of their voluntary production cuts till June. Cuts remain at around 2 million bpd, unchanged from previous guidance set in November 2023.

Despite the extension of cuts, crude prices remained muted. According to S&P Global, many participants were already expecting the extension.

Source - OPEC Monthly Report

Moreover, the recent non-compliance of production quotas by some members has become a major concern. In January, OPEC members exceeded their quota by 139k bpd. In February, members exceeded their quotas by 208k bpd.

Source - OPEC Monthly Report

Most of the non-compliance is coming from a select few nations - Iraq, Kazakhstan, Kuwait, the UAE, and Gabon.

Source - OPEC Monthly Report

Over-production raises concerns over seriousness to production cut commitments and its long-term sustainability. It is likely that over-production and the eventual roll-back of supply cuts will lead to a higher supply of crude oil later in the year.


In the near term, crude inventories are likely to see increasing drawdowns given the rapid ramp-up of refineries and persistently high fuel demand. Outages in Russia are also impacting near-term supply on a global scale.

Yet the supply outlook later in the year is less promising. The compliance of OPEC+ supply cuts are fading. Seasonal trends show that crude inventories tend to rise during the summer.

Data Source - EIA

Investors can take advantage of these trends by executing a calendar spread consisting of a long position on near term CME WTI Crude Oil Futures and a short position on a later expiry.

Though, the backwardation on crude oil has become steeper over the past month, it potentially has scope to steepen further.

The following hypothetical trade comprising a long position on the near-dated contract expiring in April (MCLK2024) and a short position on the further dated contract expiring in May (MCLM2024) provides a compelling reward-to-risk ratio of 1.4x.

A calendar spread using WTI Light Sweet Crude Oil Futures is directionally neutral. It is also beneficial from a margin standpoint. CME offers margin offsets for calendar spreads due to its relative lower risk profile of the trade. The spread requires maintenance margin of just USD 40.

• Entry: 1.0063
• Target: 1.0135
• Stop Loss: 1.0003
• Profit at Target: USD 57.8
• Loss at Stop: USD 48.6
• Reward to Risk: 1.2x


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