FxWirePro: EI Nino projections and OPEC indicate bearish risks in crude price – Calendar spreads as trading recommendations

Although the crude oil prices received a momentary boost from post OPEC-NOPEC meeting, after OPEC announced the release of 1mbd, OPEC-NOPEC clarified on Saturday, June 23 that the 1mbd will be delivered, and it was not allocated based on any quotas per country and will not be lower than otherwise communicated by some countries after the meeting on Friday. An announcement of 1mbd is bearish, as it solidifies our view that fundamentals will be weaker by the end of this year.

Recent meteorological developments have increased the probability of an El Nino event in 2018-19 to as high as 76%. Q4 would likely be net warmer than the 30-yr mean and last year on a national (GWHDD) basis with a 70% probability.

El Nino can cause droughts, flooding and other natural disasters across the globe, including heatwaves in the US that affect commodities. Past instances of El Nino have resulted in sharp drops in US residential and commercial heating oil demand and prices. Since 1950, approximately 23 winters were influenced by an El Nino episode. 

An El Nino event also typically impacts the hurricane season, as it tends to reduce the number of hurricanes in the Atlantic.

Trade recommendation: 

In crude oil, we maintain short positions in ICE Brent calendar spread (short ICE Dec 18 vs ICE Dec 19), short NYMEX WTI Sep/Oct’18 time spread and short NYMEX WTI Oct’18 versus long Brent Oct’18 contract. 

We took profits on the Sep’18 WTI-Brent trade and half of the Brent calendar spread. Courtesy: JPM

Currency Strength Index: FxWirePro's hourly USD spot index is inching towards 46 levels (which is bullish), while articulating (at 12:31 GMT). For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex