Firstly, let’s define what oil upside convexity is. In simple terms, it refers to the way oil prices behave when they are rising. Specifically, it describes how much more an oil producer can make from selling their oil at a higher price than they would have been able to if they had sold it at a lower price earlier on in the upswing.

To illustrate this concept, let’s take a look at a chart provided by Goldman Sachs (chart GS). The chart shows the relationship between oil prices and the volume of oil produced by OPEC members. As you can see, there is a clear positive correlation between the two, meaning that as oil prices rise, so does the amount of oil produced.

But here’s where things get interesting. When oil prices are rising, the rate at which they rise is not always linear. In fact, there are times when the price increase accelerates, leading to a more rapid rise in production. This is known as “upside convexity.”

So why is this important? Well, it has significant implications for oil producers and traders alike. For producers, it means that they can make more money from selling their oil at higher prices, even if the price increase happens quickly. For traders, it means that they need to be aware of these patterns in order to make informed investment decisions.