Perhaps the story of the year in financial markets, maybe the story of the last two years, has been the move in gold. As those who follow commodities know, gold tends to lead other commodities by 12 – 18 months. Therefore, traders in other products not only follow the price of gold as they anticipate movements in their own product but may even have charts that show the price of their commodity in gold, because it takes out the noise in the FX market as to whether the U.S. dollar is preferred or not. It is to this end that I bring you the chart of oil priced in gold above. Looking at a long-term chart, it has only been as cheap as it is now one time – briefly during the Covid period when demand collapsed. Other than that, looking back to 1990, oil is extremely cheap, factoring out the FX moves in the market. What is causing this?

Readers may have seen this chart before when I write about oil, because to me it is the most critical one upon which to focus. It measures the difference between international supply and demand as traders hear from the U.S. Department of Energy’s Energy Information Association. I plot the difference in supply and demand vs. futures price. Here I use the second futures contract simply to take out the roll effects or the dislocation from the negative front-month price in the past. The horizontal lines indicate when the supply or demand is 1.75mm barrels different, perhaps an arbitrary number, but one that has proved to be empirically worthwhile. It takes out the noise of the week-to-week data and only looks at extremes. I say that because I highlight with the red ovals the periods when supply exceeds demand (below -1.75) or when demand exceeds supply (above 1.75). One can see trends in futures prices – indicated by the red arrows for lower or the green arrows for higher – when levels are above or below those thresholds. One can see the increased supply from fracking in 2015, the demand collapse in 2020, the drawdown of the Strategic Petroleum Reserve before the 2022 elections and the current period. The current market is over supplied. This is not because of Venezuelan oil as some posited, because that will take years to come online. It is not even about U.S. energy producers and “drill, baby, drill.” It is more about Saudi Arabia perhaps doing a favor for its ally – the U.S. – and trying to lower prices so the president doesn’t have an “affordability” problem. Can it maintain this level of over supply?

Another periodic driver of oil prices is geopolitics. In fact, many would suggest the recent rise in oil prices is largely because of heightened tensions between the U.S. and Iran. In fact, looking at the chart on top, the geopolitical risk index is quite elevated, seeing a spike like markets saw around Liberation Day in 2025, Hamas attack on Israel in 2023 and the Russian invasion of Ukraine in 2022. It makes sense if geopolitics potentially interfere with the supply of oil – from the Middle East or Russia – this should lead to higher prices. The chart on the bottom looks at the weekly futures prices and has a vertical line drawn at the times of those geopolitical spikes. The pattern one can see, however, is that prices tend to rise in anticipation, and then reverse once the event happens. I even drew the line on the U.S. moves in Venezuela, when the market anticipated it might lead to a drop in oil, but that actually marked the bottom and not the top. Another pattern I notice is that there is a diminishing return from geopolitical spikes, as the effect is smaller each time over the past five years. As such, it isn’t clear at all that geopolitics is a reason to be long Oil futures at the moment.

Another, and maybe better, reason to be long oil goes back to the first chart of oil priced in gold. Oil, or energy in general, is cheaper now than it has ever been. I compare this to the chart of labor productivity – the total output per worker in the U.S. economy. More output per worker is the desire for all companies. I inverted productivity to highlight the relationship with oil prices. When oil is cheap, companies can run capital more intensively, operate longer supply chains at lower costs and substitute energy for labor. This raises the output per worker. When oil is expensive, output per worker is much lower and companies slow down total output. The bottom chart shows that labor productivity is highly correlated with GDP growth. Higher output per worker means higher output overall. Of course, total output in an economy is a function of total number of workers* output per worker, but in the short-term productivity can move faster will labor demographics take longer. Companies want productive workers as it leads to higher profits and leads to higher wages for more productive workers. It could mean doing more with fewer workers, though, which is the concern with AI, i.e., companies are substituting energy for labor, shifting to AI agents instead of people as energy is cheaper. Leaving aside this narrative, cheap energy points to higher growth, which in turn means more demand for energy that can offset the over supply in the energy market. This is the ultimate argument that the current administration is making – cheaper energy will allow for faster growth via the productivity channel. Will it work, and can it continue?

Are traders positioned for higher growth? I think not. Why do I say that? One can see levered money traders have reduced longs and even gone short oil post the 2024 election and all through 2025. Drill, baby, drill led to a perception that Oil futures could only go lower. Increased supply beyond the demand only drove prices lower, confirming that narrative. One can see a recent covering of shorts and move into small net long positions (though much less than any time in the last five years) likely on the recent Iran headlines. Knowing the diminishing impacts of geopolitics, one can guess the short position could come right back into the market unless the narrative changes. What changes that narrative? Higher productivity and higher growth. This leads to stronger demand and not higher supply. In many ways, traders could be seeing that already as the power demand for AI data centers is clearly in focus as the calendar has moved into 2026. While traders know data centers are planned and being built, and GDP data has been stronger, there appears to be skepticism that this is sustainable. Is it possible with continued better data, this length in the oil market will get larger?

I should also turn to the options market to see what expectations traders there are pricing in. The top chart plots the CVOL Index of implied volatility as well as the skew ratio showing relative demand for upside vs. downside options. From this chart I see a couple of things. First, despite oil futures consolidating in the 56-62 range, volatility has picked up this year and is currently above the average of the past three years. While not extreme, it is elevated particularly for the news traders have gotten. Perhaps this is the elevated geopolitical risk index, but oil volatility is at one of the higher points of the last three years, suggesting that it is perhaps more likely to mean revert to lower levels than continue higher. This may be corroborated by the skew ratio. This ratio measures the relative price of the demand for upside call strikes vs. downside put strikes. It is also quite elevated, at the highest level since last summer and one of the highest in the last three years. It is quite obvious there has been considerable demand for options, especially upside options, in the volatility markets.

If I zero in on one expiration, I see this visually much more easily. For this I have chosen the end of February, an expiration traders may prefer because it captures economic data and expected geopolitical events. I see the premium for call options from 40 delta all the way up. In stark contrast, and despite the previous bearish view of traders as per their positioning, I see put options are priced at a discount not only to call options, but relative to the at-the-money options too.

Returning to the charts of Oil price, I home in on the daily chart. I see the recent move above the 200-day moving average of $62 and prices currently throwing back to that line due to the late January commodity meltdown. The horizontal line is drawn at previous resistance which should now be support that happens to coincide with the 50-day moving average. This comes in at $59. The 20-day moving average has turned up and through the 50-day moving average indicating there may be a change in trend occurring. This range between $59-62 would appear to be the place that bulls in oil will try to defend and accumulate in anticipation of higher prices. A move below $59 would suggest this bullishness in early 2026 is all for naught.

Bringing this all together into a trade idea, I have the following: 

1. There is reason to be bullish in oil prices as demand may be increasing due to higher economic growth, which I will see in data.
2. Traders are not long futures, and if they have covered it is because of geopolitics which are fleeting and not because of higher expected growth, thus could be a catalyst.
3. Options markets show elevated (if not extreme) levels of overall implied volatility and skew, which says it may be more likely traders see lower than higher volatility from here. 
4. The correct expiration is difficult with no immediate catalyst to point to, but one that is far enough out to encompass economic and geopolitical events, perhaps the end of the month, should suffice. 

I have a matrix I refer to when trying to determine what is the proper implementation of an idea. It is based on whether my directional view is bearish-neutral-bullish and whether my volatility view is bearish-neutral-bullish. In this case, I am bullish on the direction of the underlying and bearish on volatility. That would tell me to sell puts as the best implementation of the idea, even though one’s gut might say to buy calls if they are bullish. I see that upside options are very expensive, so I don’t want to buy those. That said, outright puts may seem risky particularly if futures prices breach the 200-day moving average and head lower. I have chosen, therefore, to sell put spreads which define my risk to the difference between the strikes. In selling options, the maximum gain is also limited to the amount of premium taken in, but the benefit is that I earn time decay or theta, so every day futures prices stay the same or move higher is money in the bank.

The expiration is the WL4G6 date, which is the last Wednesday of the month. One may want to choose a different expiration and with the flexibility of daily expirations, they can choose any week and any day of the week they want. I identified the range I wanted to get long as $62-59 and so this is the put spread I sell, because below $59, I have to admit that either the catalysts I expect are not happening as I wanted or there is something else impacting the supply/demand picture. Selling this $3 spread nets me about $1.50 which means it is a 50-50 bet. If I am right and prices go higher, I make $1.50. If I am wrong and prices move below 59, I lose 1.50 ($3 strike difference less premium received). Since I think there are better than 50-50 odds that prices are higher, this trade has a positive expected value for me. In fact, it isn’t overly common to see odds even as good as these in the option prices, but it occurs because the puts trade at a discount to the at-the-money options (approximately 43 vs. 46 implied volatility). I am taking what the market gives instead of forcing a trade like long calls that may not work simply because I am paying such an elevated premium for that option. The hurdle rate for success appears lower on the short put spread.

The key for traders is to identify defined reward to risk opportunities that fit with their view and enable them to structure a portfolio with confidence. CME Group offers the resources for traders to do just that.

Good luck trading!

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