What Really Caused The Oil Price Rebound?

Written by Health Guru
  • WTI moved higher on the week by about $1.50 through Thursday as aggressive short covering tied to a bullish IEA report and an informal gathering of OPEC members in September outweighed yet another extremely weak round of DOE stats and accelerating output gains from Iran, Iraq and Saudi Arabia. $43 oil looks to be fairly valued to us at the moment and we continue to wait for the market’s longer term bearish momentum to create buying opportunities below $40.
  • To that point we still believe that there is enough negative momentum and fundamental justification to move oil into the high $30s. The global overhang of crude remains massive, product hubs are drowning in gasoline and distillates and core OPEC + Russia continue to pump oil at ludicrous speed. Meanwhile the strength of the global economy remains a risk from the demand side as evidenced by this week’s IEA report which- despite calling for global stock draws in 3Q’16 and being otherwise bullish- predicted smaller demand gains in 2017 than they had previously envisioned. Additionally, the recent round of short covering and +$4.50 rally may very well invite new short positions into the market. However, we continue to look at prompt WTI in the $38-$39 area as a buy via WTI Z16 $5 – $8 wide call spreads believing that falling U.S. output, geopolitical risks in Venezuela, Nigeria and Libya and an extremely sharp drop in U.S. refiner inputs that should slowly tighten NY gasoline stocks will help move the rebalance story back into headlines this fall. One idea we like is to work a $1.25 bid on the WTI Z16 $46/$51 call spread (currently valued near $1.85, would require a roughly $42.50 print in Z6 for the bid to get hit.) The strategy should pay more than $3 on a move back to $51 for Z16 WTI prior to the option’s November 16th expiration.
  • Away from the oil market S&Ps and EUR/USD were both supportive for risk assets this week. S&Ps reached a new record high at 2,184 while the EUR/USD rallied from 1.1050 on Tuesday to 1.1190 on Thursday. Central banks were relatively quiet and the U.S. 10yr yield remained in the 1.50 percent-1.60 percent range.

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