FxWirePro: Fair evaluation of crude’s inventory reports and hedging strategy for WTI prices

In this week’s report, for the second consecutive reporting week, Hurricane Harvey had a major impact on the weekly statistics; therefore, they should still be interpreted with a degree of caution, while the report seemingly scary for crude traders, appears to be bearish for crude and bullish for gasoline and distillate.

We assume that the industry will be approaching normal operations by the end of September. The EIA, in yesterday's September Short Term Energy Outlook, made a similar assumption; they estimated that refinery runs will average just 15.3 Mb/d in September, down from 17.1 Mb/d in August.

However, runs in October are expected to rise 0.6 Mb/d m-o-m to 15.9 Mb/d; this is a healthy 0.4 Mb/d YoY increase. Total product demand continued its sluggish streak after Harvey, as the 4w av. figure dropped 161 kb/d to 20.45 Mb/d (-0.8% YoY). The hurricane is impacting global product balances.

Crude stocks built 5.9 Mb (vs. +4.8 Mb consensus) to 468.2 Mb. Despite the overall build, imports decreased 603 kb/d while exports increased 621 kb/d. The Port of Corpus Christi re-opened on 31 August and resumed normal operations on 4 September; the port can handle about 250 kb/d of exports. Other ports still had some restrictions, which limited imports.

Option strategy:

Capitalizing on puzzling rallies of WTI crude prices major downtrend, one can load up shorts in ITM puts as shown in the above diagram of credit put spread but preferably use this strategy with a narrowed strikes and tenors.

While major downtrend could be arrested by the longs of the underlying pair with longer tenors as you’ve seen the selling momentum is intensified by leading oscillators with mammoth volumes on long term technical charts (refer monthly chart).

So, contemplating momentary rallies, it is advisable to initiate Credit Put Spread (CPS) in order to tackle both short term upswings and major downtrend.

Usually, pondering over the option sensitivity tool, IVs and OTC indications these puzzling could be optimally tackled and attained the trade or investment objectives via theta options of shorter tenors.

As we expect the retest of recent lows of 44.98 or below in the weeks to come amid any abrupt upswings.

Option sellers can reap the benefits of a high Theta near expiry by selling short-dated ATM options with the expectation of little to almost no market movement.

For ITM and OTM options as the time to expiry draws nearer, Theta lowers and decreases.

Well, in above case of diagonal credit put spreads, the strategy could be constructed at the net credit, the short leg would be absolutely at profits when underlying spot remains either at strikes chosen or at higher than strikes on the expiration of short side.

Thereafter, the major trend prolongs to evidence further slumps, narrowed OTM longs would mitigate downside risks on the other hand as the holder of such option would be having right sell at predetermined strikes.