FxWirePro: Crude/dollar correlation in trade-war scenario and WTI trade recommendation

The crude oil prices sentiments have signalled bearish stances of late, with WTI prices dropping from its recent highs of $74/bbl high to the current $69.08 a bbl handle in the recent week. Supply upside risks given higher OPEC and US oil production into 2H’18 are effective price drags. The OPEC cartel has decided to raise oil production into 2H18. We keep our WTI at $65/bbl by year-end.

While the correlation after breaking off has returned as noted in 3-month rolling correlation computed based on daily returns. If the dollar were to strengthen, then downbeat is expected for crude oil in the near-term given the return of correlation recently which will further support the near-term bearish view. Currently, the house view is for JPM USD Index to move sideways.

On fundamental front, we reiterate from our recent post that the sanctions against Turkey (a NATO ally), threats of “painful” tariffs against China made by Trump’s trade policy Grand Inquisitor Wilbur Ross and threats of “crushing” sanctions against Russia made by the US Congress – the US are obviously not trying to make friends in the world right now. Contrary to that, the latest pact between Trump and Juncker on car tariffs could help to ease global trade war tensions and act as a powerful catalyst for improving market sentiment towards EM currencies.

While CFTC investors positioning last week remained bearish on crude oil and reduced their net length in ICE Brent crude oil by more than 94k contracts to 353k in the week ended 17 July.

On a weekly change basis, this was the largest net shortening in Brent since 2011. For US light crude contract (NYMEX WTI), investors reduced the net length by only 32,200 contracts to around 402k.

This week (week ended 24 July), money managers added 14,000 contracts in net lengths but after last week’s drop net managed money Brent length has dropped below WTI in contract terms for the first time since mid-2015. The total sell-off in net lengths in Brent and WTI put together is more than 328k since the end of March. The risk to the front end is clearly evident from institutional positioning.

Hence, we initiated two tactical trades given the latest risk to crude oil price to the downside on the back of not just excess oil hitting the market from Saudi Arabia, GCC allies and Russia but also concerns of oil release from US SPR.

In addition to that, the escalating risks around US-China trade war does not bode well in terms of consumer and business sentiments and could put pressure on oil demand in the near term especially after IEA posted demand growth to have slowed to 0.9mbd in 2Q’2018.

We initiated long in NYMEX WTI for October 2018 delivery, while simultaneously, short September 2018 NYMEX WTI trade at -$1.43/bbl. Marked to market on 27 July at $0.91/bbl, for an unrealized gain of $0.52/bbl, or 0.78% of the underlying. Courtesy: JPM

Let’s glance at the FxWirePro’s Currency Strength Index ahead of today’s US non-farm employment data: FxWirePro's hourly USD spot index is struggling at 42 (which is bullish), hourly EUR spot index was at a tad below -14 (neutral), while hourly JPY is flashing 28 (mildly bullish) while articulating at 11:08 GMT. For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex