FxWirePro: Uphold WTI hedging via call spreads and Brent via time spreads on trade tariffs, sanctions and geopolitical risks

WTI crude futures price on NYMEX is seen paring back gains during trading sessions of Europe, as the bulls face exhaustion following the relief rally from $ 67.81 levels on the protectionism, sanctions, and geopolitical risks have brought volatility to the fore in commodities with oil prices, in particular, breaking out of the tight monthly range of $45-65/bbl (Brent).

This week, markets were clearly focused far more on the talks between the US President Trump and French President Macron on the Iranian deal. The US Department of Treasury had given guidance related to the lifting of sanction on 16 Jan 2016, the two that matter as of now are the ones related to banking and financial industry and the US efforts to reduce Iran crude oil sales.

Global oil price benchmark Brent is now trading close to $70/bbl (monthly) which was last seen in November 2014 just after the oil price crash due to US shale surge.

However, OPEC and Non-OPEC’s joint efforts at the end of 2016 to cut back supplies by 1.7 mbd has helped oil markets reach close to the consortium’s target of 5-year average OECD oil inventories.

Whilst oil markets have started to rebalance on the back of the OPEC-NOPEC deal as well as robust oil consumption growth observed due to synchronized global economic expansion and late commodities cycle dynamics, recent developments in trade tariffs, sanctions and military intervention in the Middle East has raised the geopolitical risks.

Trade tips:

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 $68-75/bbl call spread (net premium: $1.40/bbl). Marked to market on 25 April at $2.1/bbl, for an unrealized gain of 71¢/bbl, or 0.95% of the underlying.

On the other hand, uphold longs in Brent spread (half contract) contract with a stop loss at $2.7/bbl and target of $5/bbl as we remain constructive of the current oil price outlook as driving forces seem supportive and the latest geopolitical tensions provide further support to oil prices.

Thus, stay long the July 2018 ICE Brent and short July 2019 ICE Brent spread at $3.46/bbl. The target of $5.00/bbl and stop loss of $2.70/bbl. Marked to market on 25 April at $5.67/bbl, for an unrealized gain of $1.05/bbl, or 1.51% of the underlying.

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