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The crude oil markets have transitioned from huge global oversupply, seen in Q2’14 – Q1’16, to a rough balance forecast for the next four quarters, Q3’16 – Q2’17.
The next transition, from rough balance to a significant global supply deficit, is expected in Q3’17 – Q4’17.
Driven by falling US supply and healthy global demand, the H2’17 deficit should be bullish for prices next year.
Global demand growth is forecast at a healthy 1.42 Mb/d in 2016 and 1.27 Mb/d in 2017, driven by emerging markets, especially China, India, and other non-OECD Asia.
The US continues to lead non-OPEC supply, as US output of crude is projected to contract by 0.65 Mb/d in 2016, but to decline by a more moderate 0.32 Mb/d in 2017. We expect shale supply to bottom out in Q2’17 and then hold steady in Q3’17 and Q4’17.
Global inventories are expected to be broadly balanced from Q3’16 to Q2’17. However, in Q3’17 and Q4’17, significant global stock draws of 0.5 Mb/d are forecast, driven by seasonally stronger demand.
Hence, those who wish to initiate longs in WTI (or Brent) on dips towards $50, open positions should be coupled with the below-recommended option hedging strategy, as we expect the Dec-17 WTI price to trade up close to $60 next year.
At spot WTI price reference: $43.42, the hedger who is bearish on this commodity executes 2:1 put back-spread by initiating following trades.
Let’s just suppose hypothetical scenarios contemplating prevailing major downtrend of WTI crude. Calling for 42.22 or below levels, and shorting a near month 2m (2%) in the money put and go long in 2 lots of the same near month contracts 4m out of the money (-1% & -2% strikes of each contract) gamma puts. So thereby the net debit would be reduced to enter the strategy and any potential downswings would be taken care by 2 lots of puts.
We prefer Gamma instruments as they evidence how much the Delta would change if the underlying rate moves by 1%. A smaller Gamma means the Delta is less likely to change as the underlying market moves.
