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Crude prices continued its bearish streaks even today on the probabilities of further rises in the U.S. output undermined ongoing OPEC-led production cuts aimed at tightening the market.
OPEC is scheduled to meet on Nov. 30 to confer additional output policy. It is expected to agree on an extension of the cuts beyond their current expiry date in March 2018.
The latest consolidation of power in the Kingdom along with rising tensions between Saudi Arabia and Iran has added to the bullish sentiment and we would expect increased net lengths from money managers.
However, we believe this a knee-jerk reaction, and as long as market fundamentals remain unchanged from a week ago, we would expect a potential correction in prices immediately after the OPEC-NOPEC meeting, if not earlier.
The WTI-Brent spread widening is further exacerbated by Brent being supported far more than WTI as money managers increased their net lengths using Brent.
Idiosyncrasies around WTI make it less attractive currently as Cushing stocks continue to build on the back of high crude inflows potentially from Canada and as oil flows out of Cushing remain suppressed either due to high pipeline tariffs or to incentivize exports of the US crude.
- Initiate longs WTI time spreads June 2018 vs June 2019:
We continue to expect WTI time spreads (June 2018 vs June 2019) to strengthen on the back of refinery runs gains and tightening crude markets.
WTI structure also benefits from tighter crude balances worldwide.
As mentioned in previous trade ideas, we see stabilization in crude production per completed wells and we also increased demand next year to absorb more US domestic crude.
Additional pipeline capacity should also help strengthen these spreads.
Stay long the June 18 vs June 2019 WTI time spread at $2.9/bbl on 3 November. Target: $3.77/bbl. Stop loss: $2.32/bbl. Marked to market at $3.63/bbl on 10 November.
- Stay short Jan18 Put option and go long Dec17 Call for NYMEX heating oil contract
Distillates inventories in the US are just shy of the 5-year average. With demand expected to be driven by strong US growth, post-hurricane led recovery and potentially winter demand picking up, we think there is eventually more upside to heating oil but, given the vagaries of the weather, we would express our view via an option-based strategy.
Stay short Jan’18 NYMEX heating oil put $1.67/gal (premium of ¢2.71) and go long a Dec’17 NYMEX heating oil call $1.85/gal (premium of ¢2.5).Marked to market at +5.5%profit on 10 November.
