FxWirePro: Deploy debit call spread to hedge WTI crude’s risks ahead of EIA inventory check

Global crude oil prices have steadied at close to $70/bbl in recent weeks and have pushed to fresh three-year highs while articulating. Current prices have been slightly edgy extending losses into a third session, amid speculation on weekly inventory data that is due later in the day would show an increase in U.S. oil and fuel supplies.

The API report also showed a gain of 2.6 million barrels in gasoline stocks, while distillate stocks, which include motor diesel and heating oil, fell by about 4.0 million barrels.

The combined effect of stronger economic growth, the reload of a North American cold snap likely in February, and unplanned supply shortfalls have all tightened oil markets more rapidly than market consensus expectations previously discounted.

Go long December 2018 WTI $68-75 call spread, with the prospects that prices stay strong in the coming weeks, and possibly months, as the oil market continues to tighten and the build-up in shale growth momentum is still some way off, we look for the tightness in WTI pricing to increase.

Given the already substantial increase in prices that we have seen in the past six months, on hedging grounds, we advocate adding long a WTI 68-75 call spread at a cost of $1.40/bbl.

Go long a December 2018 WTI $68-75/bbl call spread (net premium: $1.40).