Oil VIX Heads For Biggest Drop Ever As Traders See End To Plunge
By Callie Bost
(Bloomberg) — Speculators are abandoning hedges on an oil
exchange-traded fund at the fastest rate ever, convinced the
commodity won?t be revisiting a six-year low from last month.
The Chicago Board Options Exchange Crude Oil Volatility
Index has plunged 31 percent in April, poised for its biggest
monthly drop on record. The gauge of hedging costs on the United
States Oil Fund LP, an exchange-traded fund tracking crude
futures, has dropped as the commodity has rallied 20 percent in
the same period.
Declining rig counts and a drop in the U.S. dollar have
aided a rally in crude prices since they touched the lowest
level since 2009 on March 17. The bounce in oil has been a
reprieve for both commodity traders, who earlier this year were
staring at forecasts as grim as $35 a barrel, and equity
traders, who watched energy stocks drag down the Standard &
Poor?s 500 Index.
?When oil traders were looking into the abyss of selling,
people were talking about oil getting down to $20 or $30, but it
never did get there,? Justin Golden, a partner at Lake Hill
Capital Management LLC, said by phone. His firm trades options
on equity indexes and commodities. ?Now, the market is
beginning to calm down.?
Convinced Traders
The measure of oil volatility has plunged, closing at a
four-month low last week, as shares of the fund have rallied 16
percent in April, the most in more than three years.
At the same time, CBOE?s gauge of S&P 500 options costs
known as the VIX has slid 19 percent to 12.41 as U.S. stocks
have rallied more than 2 percent and last week reached a record.
Energy companies in the S&P 500 have led the charge, jumping 6.2
percent in April for what would be the best monthly gain since
January 2013.
The oil VIX rose 0.7 percent to 37.57 at 9:43 a.m. in New
York. The S&P 500 VIX jumped 5.9 percent to 13.14.
The drop in oil volatility shows traders, who didn?t sell
their hedges during a 20 percent rally in crude from Jan. 28
through Feb. 17, are confident prices will stay at current
levels. The oil VIX increased 2.1 percent during that advance as
speculators added to protection on the fund. The commodity then
erased those gains in a month en route to its March 17 low.
Production Wanes
On Friday, the oil VIX sank to the lowest since Dec. 5, a
level it last reached when crude was trading at about $66.
A decline in the rig count has curbed production of crude,
helping boost prices and restore confidence that the slide is
over, according to Bill Baruch at Iitrader.com. The number of
drilling rigs targeting oil slid to 703 last week, the fewest
since November 2010, according to data from Baker Hughes Inc.,
an oil-services company.
?All year long, we?ve seen a steady drop in rigs,?
Baruch, chief market strategist at the commodities trading firm,
said by phone. ?There?s a lot less fear of a drop in price
action because of that.?
In response, U.S. crude production has declined in three of
the last four weeks. At the same time, Saudi Arabia?s military
campaign in Yemen has raised concern Middle East supplies may be
disrupted, further limiting supply.
Oil prices have also benefited from the dollar?s rally
losing steam. The Bloomberg Dollar Spot Index surged this year
through March 13 to the highest level in data going back to
2005. Since then, the dollar gauge has declined 4.2 percent,
coinciding with crude?s strength. Oil tends to fall when the
dollar rises as the commodity is priced in the U.S. currency.
?Real Risks?
While speculators are feeling more encouraged about crude?s
ability to stabilize here, a gauge of demand for bearish options
relative to bullish ones shows skepticism still prevails.
Puts on the U.S. oil ETF protecting against a 10 percent
decline cost 4.5 points more than calls betting on a 10 percent
rally, according to three-month data compiled by Bloomberg.
That?s 50 percent higher than the 12-month average for the
relationship known as skew and a stark reversal from June, when
bullish options on the fund cost more than bearish ones.
Short sellers in the fund have given into crude?s rally,
cutting their bearish wagers by more than half this month. The
number of shares shorted has dropped 56 percent since reaching
an all-time high March 27, data compiled by Markit Ltd. through
April 27 show.
?The trend is coming off in oil volatility,? Jared
Woodard, a senior equity derivatives strategist at BGC Partners
LP in New York, said by phone. ?All the big tail risks in oil
that drove options price higher have been worked through. People
have figured out where the real risks are in the market.?