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FxWirePro: Spot on Intricacies of Crude Oil and Trades Round-up

Crude oil has seen significant intra-day volatility this week as mixed news on the trade front and conflicting statements from OPEC kept the market on edge. The oil producer group appears to be discounting the possibility of deeper output cuts, signalling better compliance could be enough to reduce the supply surplus expected next year. OPEC chief Barkindo also highlighted that an improving macro outlook could bolster oil demand next year and noted comments made by some US oil producers on slowing output growth. In their latest market outlook, OPEC marginally trimmed their US supply growth forecasts and said they saw 0.65 mbd of stock builds in 1H20. This is slightly below our strategists’ expectations for an approx. build of 0.75 mbd during 1H’20.

Meanwhile, the EIA raised their US crude oil supply forecast for 2020 and also reported greater than expected build in crude inventories and higher oil production. The IEA affirmed its existing forecasts for demand but also raised 2020 non-OPEC supply forecasts slightly. Brent is down 1% to just under $62/bbl while WTI is down 1.4$ to $56.50/bbl.

We continue to see tighter physical oil markets in the near-term and view stronger OPEC compliance and slowing US supply growth as constructive for oil. They took profits on part of their long Jan’20 ICE Brent position citing heightened volatility in the run up to the OPEC+ meeting on 5-6 December. 

Hence, we come up with some trade updates on crude oil derivatives trades: We advocated crude oil derivatives trades on hedging grounds. 

Strategy reads this way: Shorts in CME WTI futures for October delivery for arresting downside risks in short-run, simultaneously, longs in CME WTI futures of December’2019 month deliveries. 

Contemplating above technical rationale we wish to maintain longs for now in CME WTI futures of December’2019 month deliveries. 

And also a risk reversal strategy by going long in Brent Dec’19 10D call versus short Dec’19 10D put. Thereby, we also stay tactically short Brent-Dubai Q3’19 swap spread due to mounting risks from Iran sanctions. 

Alternatively, stay long ICE Brent Jan’20 contract on supportive near-term fundamentals although they have taken partial profits on the trade. Courtesy: JPM

By Niranjan Patil
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