FxWirePro: Hedge crude’s break-out of higher range and petro-bloc currencies

The combined Brent and WTI futures and options contracts remain very high at 926k lots. The record-high net length presents a big risk to oil structure, in our view, especially if markets were to weaken on the back of increased supply from shale producers in early 2018, any other disrupted supply were to return or refinery processing rates were to decline on seasonal maintenance.

Crude prices surged on Thursday as well, boosted by robust data from top importer China amid squeaky trading movement ahead of the New Year celebration. Heading into 2018, market sentiments are perceived moderately tight due to ongoing supply cuts led by the West Asian-dominated Organization of the Petroleum Exporting Countries (OPEC), as well as top producer Russia.

From the last three-days, West Texas Intermediate (WTI) crude futures have been attempting to hit $60 mark but unable to sustain that level, currently, trading at $59.56 a barrel at 12:49 GMT. 

In 2018, the crude oil balance will likely tighten and inventories draw, on a likely 9-month extension of the OPEC-Russia accord and amid continued firm demand growth. The speed at which US shale responds will help determine whether crude hugs the top of the recent range near $60/bbl (central scenario) or shifts to a higher range that sees prices sustaining in the mid-60s (high price scenario).

An oil price breakout into a higher range is most meaningful for those currencies where output gaps have already closed and the central bank is normalizing.

Among petro currencies, CAD fits this description, and we pair a long here versus AUD, where iron ore has de-correlated with the broader commodity complex, where AUD itself has de-correlated from commodity prices, and where RBA is expected to remain on the sidelines.

Long a 6m 0.9450-0.9120 AUD put/CAD call spread. Paid 0.74%November 21. Marked at 0.37%.