FxWirePro: ‘Calendar Options Combinations to Hedge Brent Crude’ on Mounting Trade Turmoil Between US-China

“They broke the deal”, and “they will be paying”, President Trump said at a campaign rally during Asian morning hours, which has dampened risk sentiment on markets. While he also added that things will “work out”, it nevertheless looks inevitable that the US will impose new tariffs on USD200bn worth of Chinese goods tomorrow. China’s Commerce Ministry published a statement yesterday evening announcing that China would retaliate “to some degree”. It thus looks very likely that the trade war is entering round 2. This does not bode well for the trade talks which are supposed to be held in the next two days. The Chinese delegation, led by Vice Premier Liu He, will arrive in Washington today. If the new tariffs are indeed introduced, they will take effect tonight, just in the middle of talks. 

The crude oil market has sensed under renewed pressure this morning on the above-stated geopolitical issue (U.S./ China trade agreement).

As a result, Brent crude oil futures were edgy today at $70.14 a barrel by 11:08 GMT, although attempting to creep up but heading for a 3rd consecutive weekly loss.

Although crude oil prices have dropped considerably 3-4-weeks from the peaks of Brent rallies at 75.58 levels. However, last 3-4 months uptrend cannot be totally ruled out as the crude oil received the biggest boost globally in the recent past after the US government decided not to reissue significant reduction exceptions (SREs) to buyers of Iranian oil. The U.S. seems committed to reducing Iran’s oil exports down to zero and the decision was in line with our strategist’s view. 

The above chart explains the net speculative positions divided by open interest. CFTC futures positions for WTI and Brent are net long minus short for the Non-Commercial category.

While they argue that it is difficult to see Iran’s exports going down to zero (0.5-0.7mbd will still be exported in the black market or through the porous Iranian borders), the risk bias to oil prices remains to the upside in Q2’19 due to supply risks from Iran and additional US sanctions on Russia.

The risk of unplanned supply disruption is not fully priced-in as OPEC’s spare capacity seems to alleviate some of those fears. Also, Saudi Arabia is clearly being more reactive than proactive in its reaction to the SREs announcement. The Kingdom wants to see the impact of US sanctions on exports and their May’19 allocation is unlikely to change much. 

The U.S. is expected to lean on its GCC allies to help bridge the supply gap. In the official Whitehouse briefing statement, it was announced that the US, Saudi Arabia, and the UAE are working to ensure global oil markets remain well supplied. For Saudi Arabia, this will be an opportunity to increase their market share and at the same avoid pushing the price so high that it could threaten demand growth. 

Trade tips: In crude oil segment, we initiated a risk reversal strategy by going long in Brent Dec’19 10D call versus short Dec’19 10D put. They also went tactically short Brent-Dubai Q3’19 swap spread due to mounting risks from Iran sanctions. Courtesy: JPM & Commerzbank

Currency Strength Index: FxWirePro's hourly EUR spot index is inching towards -51 levels (which is bearish), while hourly USD spot index was at 55 (bullish) while articulating (at 12:52 GMT). 

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex