With U.S. oil production at a 20-year high, the shifting fundamentals of global oil supply are, in my opinion, potentially driving the price of U.S. crude closer to the generally higher-priced international benchmark.
WTI/BRENT SPREAD HAS NARROWED
In futures trading over the last few weeks, the price difference between U.S. West Texas Intermediate crude and the international benchmark Brent has narrowed to the closest it’s been in eight months, and may likely narrow further.
I believe the reason is that more of the North American oil supply had been locked in the middle of the country and it is now heading to coastal refineries, some by pipeline and some by train. That is possibly making the U.S. less dependent on foreign oil, and has driven imports to the lowest level in 16 years. There may be other reasons for the shrinking gap between the two and a key one, in my view, is increased demand at U.S. refineries pushing WTI prices higher.
Also, U.S. shale production has displaced imports of West African crude into the Gulf Coast and those barrels are now freed to go elsewhere in the world. I feel the weak European economy has also taken the pressure off of Brent, and West Texas Intermediate may be benefiting from a better U.S. economic picture, including last Tuesday’s durable goods report.
BIG NUMBERS
The U.S. is producing about seven million barrels a day, the highest amount since December 1992, while imports have fallen to 8.5 million barrels a day, the lowest since 1997. Brent demand is the weakest it’s been in a long while as the spread is currently trading at about $12.60, the lowest since July, and it was as low as $11 in June. With refiners switching to summer gas blends, coupled with a rise in the stock indices of over ten percent, I believe its no surprise to potentially see a push up to near 100.00 a barrel for WTI.
THE TRADE
The old adage says that nothing goes up or down forever and therefore I am proposing the following trade. It is my belief that we will see a pullback in stocks over the next eight weeks and it might be the catalyst that drives WTI crude prices lower.
I will look at buying the June Crude Oil 93 put and sell the 88 put for a purchase price of 50 cents or $500.00. The risk here is the price paid for the put spread plus all commissions and fees. The max you could collect is $5,000.00, minus all commissions and fees and the price paid for the spread, if both strikes finished in the money at option expiration. However, a pullback in WTI to the $93 per barrel by the end of April should potentially net some profits on this spread.
THIS REPORT IS A SOLICITATION FOR ENTERING A DERIVATIVES TRANSACTION AND ALL TRANSACTIONS INCLUDE A SUBSTANTIAL RISK OF LOSS.RISK DISCLOSURE: THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES AND OPTIONS TRADING. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THIS REPORT IS A SOLICITATION FOR ENTERING A DERIVATIVES TRANSACTION AND ALL TRANSACTIONS INCLUDE A SUBSTANTIAL RISK OF LOSS. THE USE OF A STOP-LOSS ORDER MAY NOT NECESSARILY LIMIT YOUR LOSS TO THE INTENDED AMOUNT. CURRENT EVENTS, MARKET ANNOUNCEMENTS AND SEASONAL FACTORS ARE TYPICALLY BUILT INTO FUTURES PRICES. A MOVEMENT IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED FUTURES AND OPTIONS CONTRACTS.
