FxWirePro: EIA’s inventories to stimulate shorts leg in WTI diagonal put spreads

This week’s report was bullish for crude and distillate but bearish for gasoline. U.S. EIA (Energy Information Administration) announced in its weekly report yesterday that crude inventories fell by 2.75 mbs in the week ended October 6.

Crude oil prices rallied on Friday, supported by news in the previous session of a third weekly decline in US crude stockpiles and amid global signs the market is tightening.

Total commercial crude and refined product stocks declined 1.7 Mb, driven by crude (-2.7 Mb) and distillate (-1.5 Mb). Total crude stocks have drawn 10.6 Mb since 22 Sept and now stand at 462.2 Mb, which is close to levels seen before the impact of Hurricane Harvey. The draws have largely been attributed to a ramp up in refinery runs along the gulf coast post-Harvey. Gulf Coast refinery operations are now back to normal levels as refinery utilization approached 88.5% (vs. the 5y av. of 88.3%). As Gulf Coast refiners continued to recover throughout September, refined product demand continued to be resilient and strong. 4w av. oil product demand was up 254 kb/d YoY to 20.24 Mb/d (+1.3% YoY).

Turning to global fundamentals, preliminary September commercial crude and refined product stocks for the US, OECD Europe, and Japan showed a meaningfully combined draw of 28.3 Mb or 944 kb/d. Refinery outages - driven by US storm-related disruptions - helped refined products stocks draw by 28.8 Mb; in the US, OECD Europe, and Japan they were just 28.0 Mb above the 5y av. at the end of September.

While the bulk of the overhang remains in Atlantic Basin crude, not in refined products, there is no question that strong product fundamentals and refining margins have been helping to drive global crude oil price strength. In particular, strong distillate demand and tightening distillate stocks have been an evolving bullish theme in recent months.

Crude price’s major trend being downtrend, bulls attempt to consolidate since February 2016. In short run, WTI crude prices began spiking from the lows of $49.11 to the current 51.39, capitalizing momentary rallies, it is advisable to initiate Credit Put Spread (CPS) in order to tackle both short-term upswings and major downtrend, the execution can be done by ITM shorts, while, ATM longs.

At spot reference: 51.39, buy 2m ATM -0.49 delta put, simultaneously, short 1m ITM striking put (spot/52.90).

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