Oil downside risk at four-year high on OPEC inaction fears

NEW YORK (Bloomberg) -- Energy traders are bracing for an OPEC-induced sell-off like it’s 2014 all over again. 

Investors are terrified that major producers are about to pull the rug out from under prices at their Dec. 6 meeting, a replay of four years ago when the group elected to forgo output curbs. Options show a scramble for protection in the United States Oil Fund, ticker USO, which aims to track the price of West Texas Intermediate crude futures.

Oil skew -- the difference in the implied volatility of puts versus calls -- “has surged to the highest level since 2014 on rising put demand as investors see elevated downside risk in the near-term,” Mandy Xu, chief equity derivatives strategist at Credit Suisse, wrote in a note Monday.

“Recall oil prices, which had already fallen 29% going into the November 2014 OPEC meeting, fell another 10% the day after the meeting and were down 25% the month after as OPEC disappointed on supply cuts.”

This time around, WTI futures have tumbled nearly 30% since early October before recovering to around $57/bbl. Firmer supply than anticipated due to waivers granted on Iranian oil exports, as well as concerns about demand, have weighed on prices, and uncertainty about the response of OPEC+ (the cartel and certain non-members including Russia) lingers.

While Saudi Arabia Energy Minister Khalid Al-Falih indicated production cuts are needed, his Russian counterpart, Alexander Novak has taken a more wait-and-see approach.

Xu recommends buying December put spreads that capture the event to hedge against another OPEC-fueled oil sell-off.