FxWirePro: Never bark up the wrong tree, crude prices seem fully priced in OPEC pact – Stay hedged via DCPS on demand/supply assessment

Crude prices have been broadly sturdy at this juncture of time, with lingering bullish sentiments inching near a four-week highs earlier yesterday ($52.59), but this hasn’t been the case after top exporter Saudi Arabia said it was determined to end a supply glut, it could not sustain today’s highs at $52.54.

Despite oil prices weakening post the escalation of tensions in Spain and the broader risk-off move in asset prices at the time of writing, oil prices remain supported by the structural tightening in oil markets that continues to draw down inventories.

Ahead of the dislocations created by Hurricanes Harvey, Irma and Maria, and also afterwards, we noted that it is difficult to contemporaneously disentangle the influence of the cyclical and structural drivers that were underpinning the rally in price.

At the time, we looked for the cyclical aspects of price support to fade into end 3Q’17 or early 4Q’17. However, data published this week presents a more supportive assessment of the structural drivers of the rally.

Firstly, Chinese apparent oil demand, based on National Bureau of Statistics production and refining data, point to a stronger than expected apparent demand assessment for September.

Last week’s assessment based solely on import data indicated apparent demand to be 11.23 mbd in September.

This is revised up to 11.67mbd and represents demand growth of 1 mbd MoM and 1.59mbd (+15.8%) YoY. The publication of the data detailing the monthly change in stocks should facilitate a more detailed assessment in due course.

While we now assume that the OPEC deal will conclude at the end of 1Q’18 rather than the start, the big picture remains broadly unchanged from the views expressed in the 2017 outlook. Essentially, we continue to expect the OPEC deal to support prices in the short term, but we retain reservations about the implications for supply growth from higher prices, once the deal is unwound.

For further market guidance, it is worth keeping an eye on inventory data from the U.S. Energy Information Administration (EIA), which is due to be published later today.

Well, these positive skews in 2m implied volatilities signify hedging interests in downside risks and the combination of IV 2w2m skews suggest credit put spreads that is likely to favour both upswings in short run and major downtrend.

At spot reference: $52.26, one can also deploy diagonal credit put spreads by writing 2w (1%) in the money put while initiating longs in 2m at the money put, the structure could be constructed at the net credit.