FxWirePro: Stay firm with bearish hedging vehicle in WTI crude to arrest further downside risks ahead of EIA’s inventory check

Since the recent peak on 8 June, front-month ICE Brent has fallen from $53 to $42.50, while front-month NYMEX WTI has dropped from $52 to $41.50. 

Crude oil for September delivery on the NYME fell to a session low of $39.38 a barrel. It was last at $39.53 by 07:54 GMT.

US crude output continues to decline, but crude and product demand are weakening.

Non-fundamentals: Moderately bearish, Managed money is neutral and technicals are bearish.

Major focus for the day is that EIA’s inventory check, the latest US EIA forecasts show relatively flat US crude output starting in Oct. 2016. The US EIA's July Drilling Productivity Report forecast that total US shale oil production will average 4.55 Mb/d in August, a drop of 99 kb/d vs. July. The rapid decline rate of older wells is starting to ease.

Hence, medium to long term crude oil traders who wish to invest in this commodity are advised to seek cautiously a better entry points (wait for dips) and affix an at the money -0.49 delta put option of equivalent quantities of outrights in underlying commodity, keep an expiry as long as they wish to take physical deliveries.

This strategy is usually to be employed when commodity trader is bullish on crude at this juncture, but slightly suspicious of uncertainties in the near term.

By adding this extra option position safeguards underlying portfolio but loses would be minimal and maximum to the extent of premiums paid to buy ATM options. Maximum loss occurs when the WTI price dives below spot commodity prices at expiration.