I'd like to hear opinions on buying OTM calls (say, the 50 strike) for December expiry.

Is it madness to consider? Might the fact that the world is short crude cause a short covering rally once demand comes back, which should be within a month or two? Or is it the simple case that there's just too much crude?

Saw this a few minutes ago:

U.S. Oil Fund approaching zero as all remaining shares issued
Apr. 21, 2020 9:21 AM ET|About: The United States Oil ETF, LP (USO)|By: Carl Surran, SA News Editor

https://seekingalpha.com/news/3562537-u-s-oil-fund-approaching-zero-all-remaining-shares-issued

United States Oil Fund (NYSEARCA:USO) says it has issued all of its currently remaining registered shares; -20.5% when halted earlier. Update at 9:25 AM ET: Shares are down 24.3% to $2.84.

USO says USCF management is suspending the ability of USO Authorized Purchasers to purchase new creation baskets until such time as the new USO registration statement for the additional shares has been declared effective by the SEC.

The ability of authorized purchasers to redeem redemption baskets during the suspension of the sale of creation baskets will remain unaffected, USO says.

Also, trading of USO shares on NYSE Arca will not be discontinued as a result of the suspension of sales of creation baskets.

Related ETFs: OIL, UCO, BNO, SCO, DBO, UGA, DTO, USL, USOI, WTIU, OILK, OLEM, OILX, NRGU, USAI, NRGD, NRGO, NRGZ, AOIL, YGRN

@Big Mike

The link shown below is NOT the link in the post

Should be (_ added for obvious reasons)

www_bloomberg_com/news/articles/2020-04-21/u-s-oil-fund-issued-all-registered-shares-awaits-sec-approval

SMCJB 

https://www.bloomberg.com/news/articles/2020-04-21/u-s-oil-fund-issued-all-registered-shares-awaits-sec-approval

SMCJB 

MAY20 CRUDE OIL MARGINS UP 12% EFFECTIVE TUESDAY 17TH APRIL Maintenance margin as follows (Initial Margins, ie non-member rates will be 110% of these) Tier 1 (June) increasing from 6700 to 7500, +800 or 11.9% Others unchanged.

JUN20 CRUDE OIL MARGINS UP 33% EFFECTIVE WEDNESDAY 22ND APRIL

Maintenance margin as follows (Initial Margins, ie non-member rates will be 110% of these)
Tier 1 increasing from 7500 to 8500, +1000 or 13.3%
Tier 2 increasing from 6400 to 7200, +800 or 12.5%
Tier 3 increasing from 5950 to 6700, +750 or 12.6%
Tier 4 increasing from 5500 to 6200, +700 or 12.7%
Tiers 5-9 also increase.

*NOTE*
On Tue 21st Jun20 was Tier 2 and on Wed 23rd willbe Tier 1 so actual increase is 6400 to 8500 +2100 or +32.8%
Similarly Jul20 was Tier 3 now Tier 2 so actual increase is 5950 to 7200 +1250 or +21%
Remember non-member rates will be 110% of these

https://www.cmegroup.com/notices/clearing/2020/04/Chadv20-170.html

Sorry feel like I'm posting a lot but much of this information is important...

CME Clearing ADVISORY #: 20-171
SUBJECT: Switch to Bachelier Options Pricing Model

Pursuant to Clearing Advisory 20-152 that was published on April 8th , the clearing house will switch the options pricing and valuation model to Bachelier to accommodate negative prices in the underlying futures and allow for listing of option contracts with negative strikes for the set of products specified below. The switch will be effective for the margin cycle run at the end of trading tomorrow April 22, 2020 and will remain in place until further notice.

https://www.cmegroup.com/content/dam/cmegroup/notices/clearing/2020/04/Chadv20-171.pdf



Also an interesting read. He challenges CL in its role as a Benchmark but doesn't really offer any solutions.

Reuters/Kemp: Price plunge casts doubt over future of U.S. crude futures

https://www.reuters.com/article/us-oil-prices-kemp-column/column-price-plunge-casts-doubt-over-future-of-u-s-crude-futures-kemp-idUSKCN2232MK

SMCJB 

JUN20 CRUDE OIL MARGINS UP 33% EFFECTIVE WEDNESDAY 22ND APRIL Maintenance margin as follows (Initial Margins, ie non-member rates will be 110% of these) Tier 1 increasing from 7500 to 8500, +1000 or 13.3% Tier 2 increasing from 6400 to 7200, +800 or 12.5% Tier 3 increasing from 5950 to 6700, +750 or 12.6% Tier 4 increasing from 5500 to 6200, +700 or 12.7% Tiers 5-9 also increase. *NOTE* On Tue 21st Jun20 was Tier 2 and on Wed 23rd willbe Tier 1 so actual increase is 6400 to 8500 +2100 or +32.8% Similarly Jul20 was Tier 3 now Tier 2 so actual increase is 5950 to 7200 +1250 or +21% Remember non-member rates will be 110% of these https://www.cmegroup.com/notices/clearing/2020/04/Chadv20-170.html

CRUDE OIL MARGINS UP ANOTHER 20% EFFECTIVE FRIDAY 25TH APRIL

Maintenance margin as follows (Initial Margins, ie non-member rates will be 110% of these)
Tier 1 / Jun20 increasing from 8500 to 10000, +1500 or 17.6%
Tier 2 / Jul20 increasing from 7200 to 8650, +1450 or 20.1%
Tier 3 / Aug20 increasing from 6700 to 7550, +850 or 12.6%
All other tiers increase also.

https://www.cmegroup.com/notices/clearing/2020/04/Chadv20-175.html

Baker Hughes Rig Count Down 60.
That's 305 in 5 weeks!!! (19, 40, 62, 58, 66 & 60)

Rig count not been this low since late 2016. Currently at 378 still 62 above 2016 low of 316. So next week?

Crude Oil Benchmarks

Reposting from the 'Oil Price Negative' Thread a) in case readers here are not following that thread and b) in the long term this is probably better home/reference point for the post.

SMCJB 

Brent Crude or Brent Blend is a North Sea Crude, which loads at Sullum Voe in the Sheltland Islands, Scotland. Brent Futures USED TO BE based upon Brent but as Brent production declined they switched the underlying crude to the BFOE basket while maintaining the Brent name. BFOE stands for Brent, Forties, Oseberg and Ekofisk which are the four major crudes in the North Sea. So what people call Brent actually is no longer Brent. Brent and the BFOE basket is the largest global benchmark in the world. Nearly all European, African and many middle eastern barrels trade at a differential to (dated) Brent. The Brent market consists of three major products. Obviously there are Brent Futures which trade on both ICE and NYMEX, although the NYMEX BZ contract is just a ICE copy cat, just like ICE WTI is a copy cat of NYMEX Light Sweet (aka CL). Brent Futures settle financially against the BFOE index. Then there are Forwards which typically are 500,000 barrel contracts for specified delivery months. In forward months their value is almost identical to Brent Futures, but the big difference is that Forwards eventually become physical cargoes by a process called "Passing Dates". Then there is 'Dated Brent'. This is spot Brent. It represents the value of cargoes that have been assigned loading dates. 'Dated Brent' and not 'Brent Futures' is what physical cargoes price off. There is an enormous 'Dated Brent' derivatives market most of which is quoted as a differential to either the Forwards Market (called CFDs) or the front month futures contract (called DFL or Dated-Front Line) and not as an outright price. 'Dated Brent' price assessments are performed by a company call Platts which is part of S&P. Dated Brent is currently trading several dollars below prompt futures and hit a long time low of $13.24 this week. Remember Brent is a very light and sweet crude, less desirable crudes trade at a multi dollar discount to Dated! * WTI or West Texas Intermediate is another very light and sweet crude very similar in quality to Brent. It's predominantly produced in West Texas (hence its name) and is piped to Cushing OK and to the Gulf Coast (Houston & Corpus Christi). Most people incorrectly believe there is a WTI futures contract. NYMEX even occasionally incorrectly refer to it as WTI themselves. In fact NYMEX list a 'Light Sweet Crude Oil' Futures contract symbol CL. That contract is subject to physical delivery and there are a list of crudes that you can deliver into the contract at Cushing OK which includes WTI and Brent. I believe that WTI is the only crude that is delivered at 'par', and obviously in normal circumstances is the only crude delivered. Hence why it is often incorrectly referred to as WTI and not Light Sweet Crude. This didn't use to be the case though. Brent used to come across the Atlantic, to the Gulf Coast where it was pumped to Cushing OK and delivered against the contract. Of course that was when CL was the world benchmark representing one of the most expensive crudes in the world (and traded at a premium not a discount to Brent). Fundamentals have changed though and as we all know that is no longer the case. So what is spot WTI? The way physical WTI is traded is very different between producers and gatherers and between traders. A small Producer will sell their production to a gathering company at a differential to that company's Posting Price this is called Posting Plus of P+. You can see Plains Resources Posting Prices for April 20th here. As you will see Plains posting price was NEGATIVE $41.17. That means producers selling to Plains received a negative price on Monday. This is spot physical WTI. So you assertion that spot prices have never gone negative is wrong. You will also see that 'Eastern Kansas Common Special' priced at MINUS $55 on Monday! That makes WTI look expensive! Traders trade a calendar month forward (physical delivery product) that is very similar in price to the NYMEX CL contract. If ever it isn't they can arbitrage the two. WTI physical prices are assessed by a company called Argus (used to be Platts as well but they lost that monopoly). This is why I asked you if you were saying that Argus's May WTI assessment stayed above $10 on Monday which would be a $47 differential to the futures price. I do not have access to Argus Assessments so can not answer but am very confident it was close to MINUS $37. Note that Argus have an assessment for WTI at Houston TX, Midland TX as well as Cushing OK. You will see significant difference in those quotes with WTI Houston being the highest and something the correlates more with Brent and than WTI. ** Dubai is the third benchmark and one I know little about. Unlike Brent and WTI it is a Medium Sour crude. Meaning when refined it yields less high end products (gasoline, jet, diesel) and it's products have a bigger sulfur content. It does not posses the pricing power of Brent or WTI and is used mainly for pricing middle eastern crudes going to asia. I believe that Oman has partially replaced Dubai in its capacity as a Benchmark. Then there is Tapis! Tapis is a light sweet crude like Brent and WTI from Malaysia and is used as a pricing benchmark for sweet crudes in Singapore. And that is about all I know about Tapis!

Thanks.. a wealth of information summarized better than more textbooks..btw, at some point you had posted one or 2 books describing the crude oil supply chain process (meaning all different aspects from producing, different types, selling, trading etc). Could you please post one or two good reads (that are not a 1000 pages long!!!)

jokertrader 

Thanks.. a wealth of information summarized better than more textbooks..btw, at some point you had posted one or 2 books describing the crude oil supply chain process (meaning all different aspects from producing, different types, selling, trading etc). Could you please post one or two good reads (that are not a 1000 pages long!!!)

PenWell's Petroleum Refining for the Non-Technical Person is an excellent book and not a difficult read but it's getting very difficult to find at a reasonable price.