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The risk of a trade war between the United States and China has rattled macro markets including commodities for the last one month. In addition to the risk of protectionism, there has been a significant change in the Trump administration that has raised risks of potential sanctions on key oil exporting countries including Iran, Venezuela, and Russia.
After trading in a narrow range from mid-Feb to mid-Mar, crude prices have been oscillating significantly in the last 3 weeks with WTI surging 3 and half years highs above $66 mark and Brent initially breaking above $70/bbl but soon losing those gains on the back of the trade war risks.
Panicky selling is observed and profit-booking from crude benchmarks today was facilitated by the inventory report released after US market close. The industry-sponsored API estimated that crude oil inventory surprisingly increased +1.56 mmb in the week ended April 6. For refined oil products, gasoline stockpile added +2.01 mmb while distillate fell -3.85 mmb for the week. EIA, the US governmental agency, today probably reports a -0.19 mmb draw in crude oil inventory.
On the one hand we do continue to see markets remaining in balance for the most part of 2018, however, on the other hand, exogenous factors such as trade war and sell-off in the speculative positions pose increasingly higher risks to the downside from our central scenario.
Despite the rising downside risks, given the largely supportive oil fundamentals so far and our economists maintaining their growth targets currently, we continue to stick to our central oil price scenario of $69.5/bbl for Brent and $65.2/bbl for WTI in 2018 and $64/bbl for Brent and $58.5/bbl for WTI in 2019.
We’ve already advocated long hedging strategies in our recent post and we continue to maintain the same strategies as shown below:
Stay long December 2018 WTI $62-72 call spread: The increased geopolitical risks and the recent message from the US producers highlighting some risks to the US supply in 2018 points to some risks to US and global oil market balances in the near term.
Given the still constructive view on oil prices in the coming months, we remain happy to stay long via a call spread. This is a cautious way to gain upside exposure to higher oil prices with limited downside.
Stay long a December 2018 WTI $62.10-72/bbl call spread (net premium: $1.40/bbl). Marked to market at $1.3/bbl, for an unrealized loss of 10¢/bbl, or -0.16% of the underlying.
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