Stay long crude for now, and gamma positive.

A number of factors contribute to the overnight strength in Crude and product prices. 1) The strong API data on crude oil. 2) Weaker USD. As for pt 1), a draw of almost 6mio bbl is likely to put fear in players who are short the front line WTI spreads, in particular weak shorts who are just riding on the index rolls ongoing currently. Indeed, the N9/Q9 spread has already jumped 30c from its weakest on Monday. This number again confirms that crude oil inventories are drawing down, which is consistent with reports of floating storages clearing in the crude oil space, as well as middle eastern crude tightening. Perhaps market commentators and sell side bulls will use this to call for 80, 90, or even $100 crude by year end. However, the truth is that products are still extremely weak, and unless refined products inventories starts to clear in the manner of crude is currently, it is difficult to see a strong recovery in front prices.

Jul9/Aug9 WTI spread

As for pt 2), The theme is now clear that specs are looking at the eur/usd pair to trade WTI and the trend now is on the upside. In particular, with Fed fund pricing in a chance of 50bps rate hike only 2 days ago and reversing a chunk of the move within 48 hours, there is room for USD to weaken and this perhaps is a continuation of the global reflation trade.

Technically, the bull trend begun when the 50d mov average crosses the 100day, however, that was with hindsight of course. The longer end of the curve has been the leader of this latest spike up, and with only pockets of consumers out at the moment, the move up is driven up more by hedgefunds/prop type players rather than real users. If we continue to get see data, both macro wise and oil specific terms of supply/demand balance, in particular from China, SFOT fears consumers might be forced into hedging and push the back end even higher vs the prompt. However, the fear of last year should still be sitting on their minds, especially those who hedged above usd $100. Hence SFOT cannot see this happening soon. Back end still sit stable, while prompt should move about a lot more, especially if we do see a pullback. Gamma in the front end is still recommended here.

Brent z10/z12 spread shows z12 higher than z10 by $1 over past few weeks.