Oil Market: Snapshot and Short-term Trading Idea
Macro 24/11
Hi friends,
Today, we want to take a closer look at what’s happening in the oil market lately. We’ve been seeing so much global tension, and it’s made a real impact on oil prices for quite a while now.
From Russia’s invasion of Ukraine, to ongoing turmoil in the Middle East, and the growing friction between Iran and Israel—each of these events has left its mark, and it’s all still unfolding.
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The current market in a snapshot
To start, let’s look at some graphs that we think provide a good insight into the oil market’s current fundamentals.
Beginning with OVX, the crude oil volatility index, we see it spiked recently and now it’s flattening out a bit. A rising OVX usually means anxiety—maybe over a potential supply shock, geopolitical instability, or even economic fears. It makes sense, especially with the alleged use of ICBMs in Ukraine. But remember, more volatility doesn’t necessarily mean prices will fall like we often see with SPY or QQQ when the VIX rises. It could just as easily mean the market is gearing up for a big move upward. Crude oil pricing is naturally chaotic, with all kinds of factors at play. So, the key takeaway here is that we're seeing increased activity in the oil market over the past few weeks, and this can provide us with an investment opportunity—more on that later.
Next, let’s talk about the January contract for crude oil futures (CLF2024). What stands out here is the symmetry between the spot price and OVX in recent days. We believe that the recent OVX spike is a sign that more participants are putting in bullish positions as tensions are rising. Whether it’s OPEC's decision to continue its production cuts, weather affecting oil fields, or broader indicators pointing towards better demand, the price rise we’re seeing suggests that traders are starting to see more reasons to buy rather than sell.
Finally, the spread between January and February contracts (CLF2025 and CLG2025) is another interesting part of this puzzle. The spread has been rising, indicating backwardation—when the nearer-term contract is more expensive than the later one. This means there’s a sense of urgency: people want the oil now, not later. It suggests something tight in the supply chain or an expectation that near-term demand might outstrip supply. This can be because of increased refinery demand or potential supply disruptions. When spreads like this increase, it’s often because the market’s uncertain about what’s on the horizon. On the other hand, when the spread falls into contango—where the further-out contracts are higher—it usually signals an oversupplied market.
Putting these elements together—falling OVX, rising futures, and an increasing spread—we see a market turning cautiously bullish, at least for now. It’s not shouting confidence, but there are signs we might see some bullish action in the coming days. Of course, it’s never that simple; the oil market is sensitive, and any small change in OPEC’s policy or the latest news headline could cause major price swings.
How can we benefit from this?
If you have the experience, capital, and risk appetite, you could invest in oil futures directly through CLF2025. But for most people, a more accessible way to gain exposure would be through an ETF like USO (United States Oil Fund LP).
Let’s take a look at some charts below.
In the first chart, we see USO breaking out from a triangle formation, setting up a nice opportunity for a long position. The idea would be to enter on a retest of the upper boundary, around $73.50. The shorter moving averages are trending up, giving us some bullish momentum, though the longer-term averages are still flat. This breakout could mean we’re heading higher, but as any trader knows, breakouts can reverse quickly. The key here will be follow-through—a strong move to confirm this isn’t just a false breakout.
Now, the gamma exposure (GEX) chart adds another layer to our thesis. We see a big cluster of positive gamma around the $78 strike, which can act as a stabilizer if prices move in that direction—like a safety net to catch a surge and keep things steady. On the flip side, there’s negative gamma exposure in the $60 to $70 range, but that is almost negligible compared to what we see at $78.
Conclusion
To sum it all up, the current situation in the oil market suggests a cautious but shifting outlook towards bullishness.
OVX is falling, futures prices for January are recovering, and the spread is showing backwardation—all hinting at tighter supply and improving sentiment.
For those looking to take advantage, USO looks like a promising opportunity. With USO breaking out of a triangle, there’s a solid setup for a long position—ideally entering around $73.50. Considering GEX positioning, a target around $78 makes sense, with that positive gamma acting almost like a magnet. It’s a promising play, but as always, follow-through and market strength will be key to making it work.
To end, good luck with trading next week!
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