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FxWirePro: Brent’s long hedge via calendar options combinations on geopolitical risks

Ever since the low-likelihood threat of a US government shutdown became reality earlier in the year, our macro team has worried about another President Trump vs. Democratic House confrontation upending what was considered to be routine Congressional ratification of 2018's USMCA trade agreement.

After Saudi Arabia said two of its oil tankers came under attack Sunday near the Strait of Hormuz, the waterway in and out of the Persian Gulf - a critical avenue for crude transportation. 

“The geopolitical risk premium increased over the weekend,” said consultancy Global Risk Management in a note. That became evident once markets opened in London this morning. Brent crude, the global oil benchmark, was up about 2% and West Texas Intermediate, the U.S. oil standard, was last up to more than 1.5%.

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. 

Overall, crude price trend direction appears to be little dubious for now on the back of escalating trade turmoil between the United States and China outweighed upward pressure from a surprise decline in U.S. inventories of crude too.

As the crude oil market has sensed some sort of renewed pressure this morning on the above-mentioned geopolitical issues, it is advisable to stay long hedged by adding longs in Brent crude futures contracts of mid-month tenors with a view of arresting further upside risks.

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: WSJ & JPM

Currency Strength Index: FxWirePro's hourly EUR spot index is inching towards 136 levels (which is highly bullish), while hourly USD spot index was at -26 (mildly bullish), while articulating (at 11:36 GMT). 

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

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