FxWirePro: WTI crude directional hedging for H1’2019 on decelerating US production

Energy investors would be focused for this week on the US oil inventories. A bigger-than-forecasted drop could prompt further cushion for crude oil prices.

Crude prices rallied as a risk-on wave hit commodity markets following the news that China was introducing further stimulus measures to help stabilise the economy. Significant tax cuts will be enacted in 2019, while officials promised to strike a balance between tightening and loosening regarding monetary policy. Prices were also supported by rising expectations of another strong draw in US inventories. A Bloomberg survey suggests stockpiles fell by 2.5m bbls to 437.2m bbls in the week ending 11 January. The EIA also released its Short-Term Energy Outlook, with no changes to global demand this year (+1.5mb/d). 

However it lowered its forecast for supply. Signs of further disruptions are also rising. We expect US production growth to decelerate m/m in 1H’19 due to a slowdown in completions. The recent collapse in oil prices further supports our initial assumption which was based on logistical constraints and capital discipline. 

Hence we are supportive US light crude at the front end but we believe any support to oil in the front end of the curve would cause the structure of the curve to flip into backwardation as producers will plan for a surge in production towards end of 2019/early 2020 by hedging at the backend of the curve and oil flow will be less constrained as new pipeline capacities come online. 

Any slowdown in the US production would also incentivize investors. Additionally the curtailments in Canada has clearly increased the pull for WTI molecules when the seasonal demand is not met by the Canadian molecule which we believe is likely to be the case for at least few more months ahead of us. Hence this will remain a tactical trade. 

Trading tips: Initiate longs in NYMEX WTI June 2019 and short NYMEX WTI December 2019 spread at - $1.19/bbl on 10 January. Target of +$1/bbl and stop loss of -$2/bbl. 

For the same reason described above, we also think WTI will be well supported in the months ahead as Saudi Arabia is also reducing crude exports to US strategically to reduce US inventories. 

Initiate longs in NYMEX WTI June 2019 and short ICE Brent June 2019 at -$7.97/bbl. Target of -$5/bbl and stop loss of -$9/bbl. Courtesy: ANZ, JPM

Currency Strength Index: FxWirePro's hourly EUR  spot index was at -92 (bearish), USD is at 51 (bullish), while articulating (at 04:58 GMT).

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