Thursday, 19 March 2009

Is this the beginning of the Oil squeeze?

Yesterday's DOE stats are as bearish as it can get. Demand lower, Gasoline stocks build massively against expectations. That crude prices are still rallying hard this morning can only be attributed to related rallies in equities, eur/usd and specs. Can we now rally very hard towards $55 in WTI? Yes, only if Eur/Usd and Equities sustain this rally as WTI looks cheap compared to all other asset classes. Now that technicals point to a breakout above the 100-day moving average in the front month WTI, the technical funds, hedgies + retails investors must be salivating at this 'golden opportunity'. SFOT will not go against the trend but he remains very sceptical given that underlying situation is getting worse.


Refining margins are getting hit hard now that crude oil is rallying. The higher crude goes without cracks rallying, the more refiners will cut run and the more crude will be left unsold in the market. This is already starting to look the case as SFOT hears European refineries have cut run by around 15% so far and is prepared for more. The front month spread in Brent is the widest for a while and only confirms that there are a lot of crude that can't be sold.

Brent Refining margin

The way the curve has been behaving, it seems a lot of end user type flows are in the market or it could also be specs buying the back end. Whatever the case, it now seems that we might have come to a time where volatility in the prompter months are 'cheap' to own. SFOT does not think this rally is sustainable as the FED has done what ECB did to Oil back in last summer and it could come back and hurt them harder.

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5 comments:

  1. ry19 March 2009 at 21:47

    I am not a professional oil trader looking at intraday moves, but I am commenting on the general bear case for oil I have and why I am shorting it (via the USO oil ETF) in this rally.

    Apart from supply/demand side of the oil equation, have you looked at the pricing power which oil producers have now?

    GCC/Russia/Venezuela, etc. are all facing shrinking foreign reserves and high budget deficits. It is also known that they have rampant spending programs in place either via highly levered infrastructure projects or social welfare. So, the question is, how can they afford to cut supply given the crunch they experience. I believe the crunch is a secular long term one, and many of these countries aren't elastic enough in terms of shrinking budget deficits or spending.

    Looking at demand/supply numbers for oil, the market is adequately supplied now and my assumption is demand will continue to shrink given that world trade is tumbling and will stay so unless consumer spending revives.

    Not sure what type of a bull case I can see in this rally.

    thanks.
    Ram

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  2. Anonymous20 March 2009 at 00:14

    Nice place your blog SFOT. Pretty skilled and very British style at his best.
    Ram : Agree 100% with your contribution.
    For myself, or I understand nothing at the actuals markets ( why not...) , or a torpedo is running to the boat...
    Buy the way SFOT, what instrument did you prefer to short Crude? Futures and shoot for the premium? Or ETF as our friend Ram? (I am a Stock futures guy).
    Thank for your answer.
    Francis
    ( A French Trader)

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  3. SFOT20 March 2009 at 10:17

    @Ram: Re Venezuela and Russia, i do not think supply cuts are self imposing. Rather, they are facing declining output as the current fields age and not being replaced by new finds. As for GCC, yes they are probably in a tricky moment now having to balance lower revenue now vs further demand destruction from higher prices. Among the GCC, it seems only Dubai has the massive bubble while Abu Dhabi for eg has been relatively slow in competing over the past years.

    @ Francis: Futures outright or put/spread on listed options. I have little faith myself in ETF as the curve is so volatile that you may not benefit from the right directional call simply due to the contango/backwardation effect.

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  4. ry20 March 2009 at 13:49

    SFOT, i sometimes trade put spreads on the CL futures, but the contract is just too volatile to hold onto the options and pay wait for theta decay.

    Do you generally just buy ATM put spreads and wait it out or just trade the delta on the put spread?

    ReplyDelete
  5. SFOT20 March 2009 at 14:04

    yes i do trade the delta. It is necessary in this environment.

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