(Bloomberg) — Tranquility reigns in exchange-traded funds tracking oil and its producers. Too much, says Goldman Sachs Group Inc.
Decreasing levels of implied volatility on the United States Oil Fund LP and the Energy Select Sector SPDR Fund show options speculators see little prospect of turmoil in the commodity even as the Organization of Petroleum Exporting Countries meets in Vienna, according to Goldman Sachs derivatives strategists Katherine Fogertey and John Marshall. The lack of concern could backfire with a rush to purchase hedges after OPECs decision, they said.
While the consensus is that OPEC wont announce any changes to production, there could still be swings as traders focus on other details released in the decision, according to BMO Capital Markets Corp.s Max Breier.
While the OPEC headline might be widely expected, investors might create some volatility around the details of the announcement, said Breier, a senior equity derivatives trader at BMO. If the market is looking for a catalyst, it can find one in small minutiae of data.
Oil prices slid 2.8 percent to $58 in New York on Thursday.
Dangerous Complacency
The cost of one-month hedges on the energy-stockETFhas dropped 59 percent since January, while a similar measure for the crude-futures fund has fallen 46 percent since February, according to Bloomberg data through June 3. That suggests investors do not expect the OPEC meeting to be a specific catalyst for shares, the strategists wrote.
The options market shows a dangerous level of complacency in oil and energy equities ahead of the OPEC meeting, the Goldman Sachs strategists wrote in a June 2 note. While our analysts dont expect big news, we see volatility as likely given the imbalanced positioning and high trading volumes.
Oil is poised to slump to $45 a barrel by October as a surplus of crude and producers easy access to cash weigh on the market, Goldman Sachs analysts Jeffrey Currie and Damien Courvalin wrote in a May 18 note. The firms forecast is 25 percent below the commoditys closing price Wednesday.
OPEC will stick with the strategy of favoring market share over prices in its decision Friday, according to forecasts. All but one of the 34 analysts and traders surveyed by Bloomberg said OPEC will maintain its daily production target of 30 million barrels.
The last time OPEC met, in November, the governing body maintained its production limit at the same level, insisting that suppliers outside the 12-nation group must help tackle a global surplus.
Even though OPEC kept output unchanged, oil in New York slumped more than 10 percent on Nov. 28, capping its worst weekly slide in three years. Shares of both the U.S. oilETFand SPDR fund of energy stocks dropped the most in at least three years.
My gut tells me theres not going to be much of a reaction at all, but when a dearth of macro news is hitting the tape and the sector has been volatile, people tend to make a mountain out of a mole hill, Breier said.
