Uphold commodity derivatives trades for hedging crude price risks
Brent traded in a $2/bbl range this week. After losing 2.9% in the first four days of the current week, it recovered most of those losses on Friday 09 March. Weekly decline in US oil rig count was also supportive of oil prices around the time when markets are starting to fear US shale’s growth to undermine oil market balance by the end of 2018.
Crude prices so far have been steady on this morning after the International Energy Agency (IEA) mentioned global oil demand is expected to pick up this year but cautioned supply is also growing at a faster pace.
Primarily, our recommendation is that WTI $68-75 call spread of December 2018 tenors: Well, increased financial market volatility is causing oil price stresses. Given the still constructive view on oil prices in the coming months, we remain happy to stay long via a call spread. This is a cautious way to gain upside exposure to higher oil prices with limited downside.
However, we favored slightly bulls as the underlying crude prices seem to be cushioned by the healthy demand coupled with the supply constraints from the OPEC. The oil exporting organization has constantly been dropping output by around 1.2 million barrels per day (bpd) ever since its promises in January 2017.
Hence, we advocate staying long in a December 2018 WTI $68-75/bbl call spread (net premium: $1.40/bbl). Marked to market on 9Marchat $0.94/bbl, for an unrealized loss of 45¢/bbl, or -0.69% of the underlying.
Secondarily, stay long again in the July 2018 ICE Brent $55-70 risk reversal: We remain constructive on oil prices in the short term. We choose to hold further upside exposure by staying long a $55-70/bbl risk reversal in July ICE Brent for an initial premium of $0.30/bbl.
Stay long the July 2018 ICE Brent $70/bbl call and short the July 2018 ICE Brent $55/bbl put for a net premium of $0.30/bbl. Marked to market on 9 March at $0.59/bbl, for an unrealized gain of 28¢/bbl, or 0.44% of the underlying.
Lastly, also recommended longs in July 2018 ICE Brent and short July 2019 ICE Brent trade: We remain supportive of our current oil price outlook and believe the recent sell-off to be more technical rather than fundamentally driven.
We remain long the same Brent spread contract with a stop loss at $2.7/bbl and target of $5/bbl. Longs in the ICE Brent of July 2018 deliveries and short in ICE Brent spread of July 2019 tenors at $3.46/bbl is targeting of $5.00/bbl with a strict stop loss of $2.70/bbl. MTM so far at $3.56/bbl, for an unrealized gain of 10¢/bbl, or 0.15% of the underlying.
Source: FXWire Research