FxWirePro: Crude projections indicate stocks to pile up- Long term trade ideas for Brent and WTI oil futures

The underlying fact for ongoing drops of crude oil prices being supply glut, oil prices are broadly unchanged from last week as market participants awaited three key decisions from different branches of the US government on Thursday. While Brent and WTI prices reacted somewhat positively immediately following the Fed decision to maintain rates, they remained range-bound over the rest of the day.

While SPR-related crude buying has helped clear West African crude surplus for the time being, we expect to see Atlantic Basin crude surplus to increase in October and November and as such expect prices to fall further from current levels and we recommended going short the December'15 ICE Brent futures contract, which is trading in the money by $4.03/bbl at the time of writing.

With our revised assessment of Cushing crude stocks, we think that spring turnaround season could lead to material stock builds and as such see the potential for WTI structure to deteriorate versus the current levels, which are strongly bid on the back of current fundamentals. As such, we go short WTI time spread with a suggested target of -$2/bbl and a recommended stop at -$0.65/bbl. We recommend shorting NYMEX WTI futures contract of the March'16 expiry against that of June'16 contract. This calendar spread is trading below $0.40 /month, less than the storage costs in the Cushing area.

We also recommended adding long the January'16 ICE gasoil futures contract against that of ICE Brent (winter ULSD crack), currently in the money by $0.40/bbl. The fall refinery maintenance season will potentially lead to this crack breaking out of the $1/bbl range it has been trading over the past month as product supply falls. As such, we recommend going or remaining short this crack at current levels.