You can’t start thinking about what could happen to the price of oil, or in fact, any commodity, without considering the supply and demand picture. Fortunately for oil traders, the EIA puts out weekly data on consumption and supply. Whenever supply exceeds demand (lower line) by more than 1.5%, or when demand exceeds supply by 1.5% (upper line), there’s a trending move in the price of oil. These are the times when the supply and demand picture is clear. Supply and demand have both been in focus this year with OPEC+ discussing increasing supply and fears of a global economic slowdown from tariffs potentially impacting demand. However, what does the data tell us? In Q1, supply did in fact exceed demand by more than 1.5%, and markets saw the requisite move lower in the price of oil. Since that time, there has been a sharp rebound in the supply and demand picture, and at this time, there is no clear signal coming from this important measure within the oil market.

Another tenet of the commodity market is the use of technical analysis. After all, there is only so much “fundamental” data, so technical analysis plays a bigger part in commodities than in markets like equities. For this, I like to use the Ichimoku cloud, which identifies the areas where the buying and selling have occurred in the past month to determine if there is any trend and to determine where bulls and bears alike will want to defend their position. In the circle on the right, the recent price action has taken the generic front-month futures below the Ichimoku cloud, suggesting a breakdown in price. In order to see if this is confirmed, one needs to look at the lagging span (red line) and whether it is breaking below as well.  One can see in the circle on the left that the lagging span is still holding above the cloud which may suggest that this is a false breakdown and something that is buyable. One may also see this is the case with the MACD in the center panel which indicates no immediate change in trend. Is this recent break a chance to buy, given the supply and demand picture largely intact?

Turning to the weekly charts, traders get a picture that may not be quite so sanguine. In this chart, both price and lagging span are below the Ichimoku cloud, and each has failed to move above this cloud since breaking below back in 2022. It has been a slow trend lower, and every move higher on geopolitical news has stalled right at the cloud. The cloud as well continues to press lower suggesting the longer term trend is still downward. There is no sign of exhaustion from the RSI (lowest panel) and no strong signal from the MACD (middle panel). The oil market does appear to maintain a longer term downtrend.

Perhaps this longer term downtrend has emboldened managed money to begin reducing its length. The current positioning is near the lowest long that managed money has maintained over the past 3 years. In fact, each time the net position dips below 100,000 futures, it seems to bounce from that level to almost double. Markets have seen this bounce three other times in the past 3 years, each of which has led to a move higher in futures. Is the current positioning set-up a catalyst for a move higher in futures?

There are a couple of big catalysts in the next 1 – 2 months outside of the weekly EIA data that could prove to light a fire under the futures. The first is the OPEC+ meeting the first Sunday in August, which will then have another in September. The other is the deadline the U.S. has given Russia on September 12 to come to a ceasefire agreement with Ukraine. After this date, presumably Russia risks sanctions, which could potentially keep Russian barrels off the market. Looking at the ML1Q5 implied volatility, it does not have the discount a typical Monday contract may have relative to the Friday and Tuesday, because of the OPEC+ meeting. Looking out to the September 12 ceasefire data, we can see that the LOV5 contract is trading at a volatility of 35.46, which is below the XL2Q5 contract at 39.03. This is because of the headlines that the ceasefire date has moved forward in addition to tariffs being put on India because of Russian energy. There are a lot of moving parts. However, when it comes to the president, there’s been a tendency in 2025 for deadlines to be pushed out as they are approached. Is it possible that the original September 12 date might come back into play? Is this an opportunity?

My final stop is the CVOL tool from CME Group. From this, I can see where volatility is trading relative to its own history and relative to other products in the energy space. On both fronts, oil volatility looks relatively low, since it is trading near the lows traders have seen over the past three years. This tells me that long volatility strategies have support because the reward to risk is more favorable at these levels. The bottom chart looks at the Skew Ratio, or the relative pricing of upside options vs. downside options. This measure is elevated even if it is down from where it hit a month or so ago, after the U.S. military action in Iran. Traders, perhaps those with less long than normal, appear to prefer to buy upside options if they are going to buy anything. Thus, if I am looking for a bullish option idea because of the short term technicals and light positioning, where I am long options, I have to be creative since simply buying calls is less attractive with the Skew Ratio so high. The other vanilla idea of selling puts is equally unattractive because the CVOL Index is so low. This sounds like the job of an option spread.

Putting these ideas all together, the setup sounds perfect for a calendar. In particular, a long calendar where I buy the far date and sell the near date, getting me long volatility at a low level and not overpaying for calls that look in demand. With the implied volatility curve somewhat downward sloping and apparently not pricing in a move of the deadlines back to the original September 12 date, I believe a long LOV5 vs. short XL2Q5 spread makes sense. I choose a diagonal where I sell a 69 call and buy a 70 call at the farther date. I am comfortable with this because in the short term, prices appear to be breaking down, which means the premium on the XL2Q5 69 calls will deteriorate more rapidly. Yes, the LOV5 70 call will also lose value if futures tick lower, but not at the rate of the XL2Q5 65 calls. The best case scenario is that the futures do nothing for the next 2 weeks until the XL2Q5 options expire, after which futures rally perhaps from a cut to Russian supply if no ceasefire is reached. So, either a breakdown which is then bought back or a sideways market with a futures rally would both potentially win with a diagonal. If futures tank from here and both options expire worthless, I will lose a very small amount of premium as the spread is essentially zero cost. If futures move sharply higher before the XL2Q5 expiration, a trader will have a choice. They will get assigned on the short 69 call and be short futures. At that time, they can buy some futures back and turn the 70 calls into a straddle (delta neutral calls = straddle). They could stay short the futures they were assigned and use the 70 call as their stop loss and trade the market from the short side. Finally, they could buy back all of the futures and be outright long 70 calls. Since the options settle into different futures, the trader would need to roll their futures position out one month as well, depending on what they do above. It is too early to say the best plan of action, but typically on a call diagonal where there is a sharp rally early on, turning the far date into a straddle and staying long gamma for the event is the preferred decision.

CME Group not only gives a trader the tools to analyze the market, but also, the expirations to trade it effectively. A call diagonal around a ceasefire catalyst may be just the way to take advantage.

Good luck trading!

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