FxWirePro: Calendar spread, call spread and risk reversal trades for crude oil – Trios to mitigate bullish risks

Crude’s demand-supply equation to prop up prices and to bring in bullish risks:

During International Petroleum week, the message was clearly far more optimistic than previous years, especially as there was a clear consensus on the market being balanced and perhaps drawing faster than expected on continued OPEC cuts.

Crude oil prices strengthened especially after the International Energy Agency said on Monday that global oil demand was expected to grow in the next five years, while the output from producers in the Organization of the Petroleum Exporting Countries (OPEC) would rise at a much slower pace.

OPEC, along with some non-OPEC members led by Russia, agreed in December to extend oil output cuts until the end of 2018. In Riyadh, with a clear message that OPEC and contributing members will support the cuts as long as it takes to help balance the markets, and strong support was noticed from both Saudi Arabian and Russian oil ministries.

In addition to that, trade-weighted dollar has strengthened by 0.3% recently, which is also likely to have contributed to some moves in commodity prices in general and oil prices in particular.

Options trading recommendations:

Add long July 2018 ICE Brent and short July 2019 ICE Brent trade:

Adding long in ICE Brent for the July 2018 delivery and short in ICE Brent for July 2019 spread at $3.46/bbl would likely target $5.00/bbl and stop loss of $2.70/bbl. Marked to market on 2 March at $3.51/bbl, for an unrealized gain of 5¢/bbl, or 0.1% of the underlying.

We’ve been constructive on current oil price condition on above explained fundamental factors and it is reckoned that the recent sell-off to be more technical rather than fundamentally driven. We uphold longs in the same Brent spread contract with a stop loss at $2.7/bbl and target of $5/bbl.

Stay long December 2018 WTI $68-75 call spread:

Capitalizing on rising volatility, we advocate long in a December 2018 WTI $68-75/bbl call spread (net premium: $1.40/bbl). Marked to market on 2 March at $0.70/bbl, for an unrealized loss of 70¢/bbl, or -1.1% of the underlying.

Increased financial market volatility is pressuring oil prices. Given the still constructive standpoint 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.

Stay long the July 2018 ICE Brent $55-70 risk reversal:

Although bearish sentiments are lingering we reckon that they are momentary, instead, we’ve been constructive on crude oil prices in the medium 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.

Go 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 2 March at $0.00/bbl, for an unrealized loss of 30¢/bbl, or -0.5% of the underlying.

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