OPEC has delivered real, impacting cuts but has communicated poorly to a bruised and low confidence paper market setup for a “beat”. This misread or (temporary) misappreciation of the crude oil picture as it stands, provides good risk/reward trading opportunities. There is a “Saudi Put”, which has big implications for traders to monetise mispriced option volatility structure and for hedgers to adjust hedges.
Oil prices have now recovered back into the post OPEC/NOPEC range. With OPEC’s meeting tomorrow on 25th May, we look at the most plausible outcomes, what it means for the market and the impact on producers looking to hedge on the curve.
Analysing hedging flows and chart technicals have provided key inflection points for oil prices. The picture, as it currently stands, suggests that oil prices are forming a floor on the back of past two week’s selloff.
Short-term prices continue to face downside risk, primarily driven by our read that US weekly inventory data could be negative. Still, the picture is significantly more constructive for oil and time spreads should outperform flat price as we get closer the $55 bbl level.
Last week’s selloff to last Friday’s low of $46.65 bbl in Brent caused a lot of psychological damage in the market.
As it stands today, investor positioning has “cleaned up”, improved fundamentals in the form of stock draws are imminent and the OPEC meeting is only two weeks away.
Funds and weak technicals triggered the selloff, not a sudden change in fundamentals. Hedging flows, provide interesting clues as to current positioning. Our read is that the market is at risk of a “slingshot effect” (with OPEC meeting ahead).
The market currently provides an opportunity for producers to restructure hedges and take advantage of current (and temporary probably) “derivative dislocations”.
Consumers have an attractive opportunity to layer in hedges at current levels. Short covering should provide short-term tailwind to prices and longer term, supply/demand balance picture is ticking more positive.
Oil is down $10 bbl since recent highs, erasing all post OPEC/NOPEC price gains. Market struggles to explain the selling, as not driven by fundamentals.
Momentum funds are in position of strength with clear targets ahead. The market, especially participants with positions caught offside, is eyeing any signal from Saudi Arabia for price direction. Any price recovery could be explosive as the short strike above could amplify buying as witnessed on the move down.
Chart technicals still point to further selling ahead: however, risk/reward suggests a good buying entry point. For commercial producers, current market conditions provide an opportunity to restructure and optimise hedges.
For consumers, coffee prices are at an interesting level to layer in protection hedges. We believe ICE Arabica will outperform Robusta. Both look attractive up to 2 years out. We look at optimal hedge structures which provide best value.
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