FxWirePro: Glimpsing through crude stocks check ahead of EIA’s inventories and derivatives strategies

The crude prices are stuck in a narrow range $47.75-47.50 levels earlier today ahead of the lingering speculation on weekly supply data announcement which is due later in the US session (14:30GMT). Energy markets have adjusted to a number of fundamental developments this week that on balance, (but not exclusively), were bearish for prices. In different market conditions, these developments could have proven significant negative catalysts for oil prices. Many analysts project inventories to drip by approximately around -3.3 million barrels at the end of last week.

The backwardation at the front of the Brent futures curve increased over the course of the week. Still, crude prices touched three-week lows mid-week and WTI lost more ground relative to Brent during the week.

This underperformance in WTI prices comes despite an 8.9 mb w/w decline in crude stocks, the largest since last September. This was counterbalanced by weaker-than expected product supplied levels (a proxy for demand), and increased product and Cushing crude inventories, the continued growth in US crude production also dampened the impact of persistent crude draws, which have reduced stocks by a cumulative 69 mb (-13%) over the past 4-5months.

Derivatives Strategies:

Dubious traders are advocated to use calendar straddles for both speculation and hedging.

Those who are envisioning the short term range bounded trend and uncertain trend in long term from above OTC market’s rationale; we reckon that the calendar straddle would be more advantageous to keep priced fluctuations on the check.

The strategy could be executed by shorting a near term straddle while buying a longer term straddle with an intention to profit from the rapid time decay of the near term options sold.

Well, it is a limited return with the limited risk strategy entered by the options trader who ponders over that the underlying spot commodity price would experience very little volatility in the near term.

Execution: Stay short in ATM call and ATM put of 1m expiry, while simultaneously buy 3m +0.51 delta call and -0.49 delta put of the similar tenor at net debit.

Maximum loss for the calendar straddle is limited and is likely incurred when the spot price had moved hugely in either direction on the expiration of the near term straddle.

Alternatively, as we don’t encourage long-term long build ups, on hedging grounds we advocate shorts in WTI crude futures of mid-month tenors as the underlying price of this energy commodity may slide again upto 45.75 levels, maintain strict stop at $50 levels, use far-month tenors for targets upto $42 levels with SL at $55.