The supply estimates of now incorporated in our forecasts for the coming 18 months drive a further structural loosening in projected market balances.

Consequently, we lower price forecasts for 2017 and 2018 to $55.75/bbl and $55.50/bbl for Brent and $53.75/bbl and $53.50/bbl for WTI, respectively.

However, we remain tactically bullish on oil for the next two quarters, even if less ambitious in our price targets than previously.

We, therefore, view the mid-March10% decline in prompt futures prices as an excellent risk-adjusted opportunity to buy oil, assuming markets tighten in the coming quarters as we expect.

We take profits on the short August/September Brent spread trade and open an outright long August Brent crude position and long July/December 2017 Brent spread trade.

These reductions to price forecasts reflect positive reassessments of non-OPEC supply prospects in the US, Canada, and the UK. For the avoidance of doubt, it is not tied to the speed, or lack thereof, of the current implementation of reduced production levels by OPEC and select non-OPEC producers, which we view as broadly in line with (and if anything slightly ahead of) our expectations.

The recent decline in Brent and WTI prices appears to have been driven by the liquidation of record managed money net length in futures markets.

However, this is a symptom and not a cause of weaker prices. The cognitive dissonance between the expectation of tighter markets which should result in stock draws, and the high profile weekly US data that are yet to confirm these developments in a convincing fashion have arguably undermined prices.

Hedging Strategy:

Well, in order to arrest this upside risk that is lingering in intermediate trend and prevailing decling trend, we recommend diagonal option strap strategy that favours underlying spot’s upside bias in long run and mitigates bearish risks in short term.

So, we recommend building the FX portfolio exposed to this pair with longs positions in 2 lots of 3M ATM 0.51 delta calls and 1 lot of ATM -0.49 delta puts of 1m expiries.

Since the slumps are likely in near term and upswings in long term, option straps strategy should take care of both upswings and downswings simultaneously even if OPEC surprises with the forecasters, and the strategy is likely to derive handsome returns on the upside and certain yields regardless of swings on either side but with more potential on upside.