FxWirePro: Trade updates and reshuffling of WTI/Brent time spreads

Crude price has been dipping 4% after the Saudi energy ministers said OPEC was in “produce as much as you can” mode and industrials earnings outlooks from Caterpillar and 3M disappointing investors, with the former noting cost pressures exacerbated by US tariffs, with Brent crude fell below $76bbl on rising US stockpiles and Saudi pledges of additional supply.

The long position in WTI Jan-Feb’19-time spread is squared off as it was stopped out during last week’s sell-off in the US oil price on a higher than expected inventory build and the macro risk led correction across various asset classes.

However, as it is observed that the US production growth slowing from its peak in mid-2018 and pipeline companies could bring forward some of the pipeline completion dates as evident from the strength in Midland-Cushing spreads, we feel the WTI time spreads are under-priced and should strengthen from here onwards. We will look into re- entering this trade at another time. 

Initiated longs in January 2019 NYMEX WTI and short February 2019 NYMEX WTI trade at 0.17/bbl on 19 Sep. Target of $0.4/bbl and stop loss of $0/bbl. But for now, squared off the position. 

While we maintain the longs in Dec’19-Jan’20 ICE Brent spread at $0.34/bbl 

The price forecasts are upgraded for 2019 Brent by $20.5/bbl to $83.5/bbl. The bullish argument is strongly driven by tighter supply due to Iranian sanctions and declining spare capacity that we think markets are not pricing in yet completely along the curve yet.

We also think backend is suppressed due to hedging activity but as we move closer to the end of 2019, we will see increased hedging from consumers rather than producer but also increased demand for Brent based benchmark crude to meet the IMO spec Marine Gasoil demand from Jan 2020. This should be supportive of the time spreads at the back end of the curve. 

Initiated longs in December 2019 ICE Brent and short January 2020 ICE Brent trade at $0.34/bbl in September. Target of $0.6/bbl and stop loss of $0.1/bbl. Marked-to-market on 19 Oct at $0.34/bbl of the underlying. Courtesy: JPM

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