At the tail end of 2008, the last time oil prices traded at $35 a barrel, some vacationing oil traders missed out on an abrupt $16 surge that helped define the bottom of a five-month, crisis-induced collapse.
Few expect a repeat this holiday season, however, even as market liquidity has fallen by more than half, increasing the chances of a lurch in a thinly traded market.
While dealers and analysts interviewed by Reuters this week expressed a cautious stance heading into the holiday period, few said they were positioning to benefit from even a short-term recovery, and bullish $38 to $42 options volumes were muted.
"The best trade right now is no trade," said one trader.
The comparison to 2008 emerges from the coincidental timing of unexpectedly low prices. On December 24, 2008, Brent crude hit $36.20 a barrel, its lowest level since July 2004 amid the financial crisis. This week, it dipped below that point for the first time since 2008.
Seven years ago, prices abruptly turned higher, rising for six of the next seven trading days to gain 44 per cent, or $16 a barrel. They then traded sideways until April.
Shale oil revolution
Unlike today, the market had plenty of help.
For one, the Federal Reserve was slashing interest rates from 4.5 per cent to near zero in the aftermath of the Lehman Brothers failure; last week it raised rates, by a quarter percentage point, for the first time in almost a decade, adding fuel to a dollar rally that has weighed on prices.
OPEC had agreed to cut production just a week earlier; now it is pumping full tilt. The market itself held a more bullish outlook for the years ahead: Oil contracts for five years forward were trading at nearly $70 a barrel in late 2008. Today, oil for 2020 is barely holding at $50.
That discrepancy is largely explained by the shale oil revolution, which didn't exist seven years ago. Worries about 'peak oil' have been replaced by expectations of sub-$50-a-barrel crude for at least a decade.
"If anything, the risk is more to the downside," says Olivier Jakob, an analyst at Petromatrix in Zug, Switzerland.
Even so, he warns that volatility may be ahead.
Vanishing liquidity
To be sure, in the third leg of an 18-month-long slump, there are few takers for new bearish bets, notwithstanding another warning from Goldman Sachs analysts on Monday that global market imbalances will extend into the next year on increased production and lackluster demand.
Given the oil market's ability to surprise, nothing should be ruled out, some traders warn, and a rapid turnaround in prices could spare US shale producers from virtually certain pain in the new year.
The Singapore Exchange warned on Tuesday that "further moves may be exaggerated" due to low liquidity.
On average over the past seven years, trading volume in the final week of December was 60 per cent lower than activity in the first week of the month. On Friday, trade in US WTI oil futures reached just 700,000 lots, less than half the record 1.6 million on December 8, according to exchange data on Thomson Reuters' Eikon.
While volumes in December typically fall off quickly, traders have already made their bets and are waiting to see how futures will respond in coming weeks, according to Matthew Perry, a partner at hedge fund Kronenberg Capital Advisors LLC.
Dealers in 2008 also had fewer reasons to be concerned about global supply surplus. Although oil was already accumulating on idling tankers, stockpiles in Cushing, Oklahoma, were just barely creeping toward new highs above 28 million barrels. Now, stockpiles are more than 60 million barrels, eclipsing previous peaks.
Nationwide, crude stocks in late 2008 were the highest seasonally in two years; today, they're nearly one-third higher than their previous peak a year ago.
Covering
Traders worried about a quick rebound have a few options. They can buy protective financial calls options, a strategy in which a trader with an existing short futures position can buy a call to protect against a rise in the underlying price. Those calls are currently cheap, traders say.
They could also convert short positions into long puts, in which investors believe the price of oil will fall below the strike price.
Few traders have chosen to do either, according to four dealers.
The premium for February 2016 $40 calls is trading near its record low, with open interest at 12,700. Meanwhile, the premium for February 2016 $30 puts rose steadily from November through mid December, with open interest at 25,500.
Of the 20 most active options, only four are calls.