FxWirePro: Have fragile WTI crude futures deteriorated in line with market fundamentals? Near month CFDs to hedge bearish risks

The crude oil prices have fallen heavily and at times precipitously over the past week by a cumulative 6.5%. Consequently, oil prices have slumped below the level prevalent before the OPEC agreement in late November.

Fundamental developments for such a dramatic sell-off appear thin on the ground. Yet with scant evidence that OPEC production cuts are actually tightening oil markets as expected, the capitulation of speculative length has seemingly dominated price action this week.

We highlighted in mid-April that the then price weakness in oil prices was likely tied into the deterioration in physical markets.

We highlighted three cash market differentials that pointed to weaker fundamentals:

First, Brent futures market structure has improved since mid-April to -$0.32/bbl from -$0.50/bbl. Thus, Brent-related markets no longer appear to be pricing close to floating storage economics.

Second, the differential of Dated Brent to the futures market has recovered from the four-month lows seen in mid-April, albeit still only at levels seen in March.

Lastly, the inter-week spread between CFD pricing within the Brent market has only improved marginally from mid-April, suggesting that there very prompt barrels still require a discount versus deferred cargoes so find buyers.

Hence, we don’t encourage long-term short build ups hereafter; instead, advocate shorts in WTI crude CFDs of near-month expiries for targets of $46.75 or even upto retest of $45 levels can also be possible, initiate trade with strict stop loss of $48.90 levels, thereby, the trade carries attractive risk reward ratio.