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🔝 US Gas prices become more affordable as key breakdown is hereAmericans could breathe a sigh of relief with gas prices set to be more affordable this year. US gas prices hit their highest 52 Weeks in August and September ahead of Labor Day, with the national average standing at $3.82 a gallon FRED:GASREGW , per AAA Gas Prices . Gasoline prices hit summertime levels in over a decade even as the driving season comes to a halt, as a result of rising crude-oil prices TVC:USOIL driven by production cuts. Brent crude TVC:UKOIL , the international benchmark, jumped to $90 a barrel earlier is September for the first time in 2023 after both Saudi Arabia and Russia extended oil production cuts of 1.3 million barrels a day through December 2023 in a bid to maintain price stability. Higher US gas prices NYMEX:RB1! are a problem for the Federal Reserve, which has been trying to tame historically high inflation. The central bank has already hiked interest rates ECONOMICS:USINTR by more than 500 basis points since March 2022, helping lower the pace of consumer-price increases to 3.2% in July from last year's highs above 9%. But the jump in fuel prices is threatening to derail the progress the Fed has made in taming inflation. As a result, just after September, 2023 FOMC meeting market participants are waiting one or maybe two dovish Fed's Rate price actions in 2024. At the same time before September, 2023 Federal Reserve meeting, market expectations were about three cuts, near to four. (up to 100 b.p.). Meanwhile juts a take a look what technical picture in RBOB Gasoline futures RB1! price says. Near the middle of August, 2023 Gasoline futures prices turned massively down, due to seasonal backwardation in RBOB futures contracts, where autumn RBOB futures contracts are usually to be trade lower vs. summer RBOB futures contracts. Moreover, in the last day of Q3'23 RBOB futures price turned firmly lower, breaking down the major trendline support that was actual all the time from disinflationary Covid-19 era. Moreover weekly SMA(52) is broken down also. In a conclusion, I have to say that retail gasoline prices are usually to follow the major trend, within one or up to two months.
NYMEX:RB1!
by Pandorra
Primer on Crude Oil Crack SpreadEver dreamt of being an oil refiner? Fret not. You can operate a virtual refinery using a combination of energy derivatives that replicates oil refiner returns. Crude oil is the world’s most traded commodity. Oil consumption fuels the global economy. Crude is refined into gasoline and distillates. Refining is the process of cracking crude into its usable by-products. Gross Processing Margin (GPM) guides refineries to modulate their output. Crack spread defines GPM in oil refining. This primer provides an overview of factors affecting the crack spread. It delves into the mechanics of harnessing refining spread gains using CME suite of energy products. UNPACKING THE CRACK SPREAD Crack spread is the difference between price of outputs (gasoline & distillate prices) and the inputs (crude oil price). Cracking is an industry term pointing to breaking apart crude oil into its component products. Portfolio managers can use CME energy futures to gain exposure to the GPM for US refiners. CME offers contracts that provide exposure to WTI Crude Oil ( CL ) as well as the most liquid refined product contracts namely NY Harbor ULSD ( HO ) and RBOB Gasoline ( RB ). Crude Prices Crude oil prices play a significant role in determining the crack spread. Refining profitability is directly impacted by crude oil price volatility which is influenced by geopolitics, supply-demand dynamics, and macroeconomic conditions. Higher oil prices lead to a narrowing crack spread. Lower crude prices result in wider margins. Expectedly, one leg of the crack spread comprises of crude oil. Gasoline Prices Gasoline is arguably the most important refined product of crude oil. Gasoline is not a direct byproduct of the distillation process. It is a blend of distilled products that provides the most consistent motor fuel. Gasoline prices at the pump in the US vary by region. Price differs due to differences in state taxes, distance from supply sources, competition among gasoline retailers, operating costs in the region, and state-specific regulations. CME’s RBOB Gasoline contract provides exposure to Reformulated Blendstock for Oxygenate Blending (RBOB). It is procured by local retailers, who blend in their own additives and sell the final product at pumps. RBOB is blended with ethanol to create reformulated gasoline. It produces less smog than other blends. Consequently, it is mandated by about 30% of the US market. RBOB price is thus representative of US gasoline demand. Each CME RBOB Gasoline contract provides exposure to 42,000 gallons. It is quoted in gallons instead of barrels. The contract size is equivalent to one thousand barrels like the crude oil contract. Distillate Prices Distillate or Heating Oil is another important refined product of crude oil. Distillate is used to make jet fuel and diesel. Demand for distillate products is distinct from gasoline demand. A substantial portion of the North-East US lack adequate connection to natural gas. Hence, the region depends on HO for energy during winters making HO sensitive to weather. CME NY Harbor ULSD contract ("ULSD”) provides exposure to 42,000 gallons of Ultra-low sulphur diesel which is a type of HO. ULSD contract is also equivalent to one thousand barrels. Chart: ULSD Price Performance Over the Last Twenty Years. TRADING THE CRACK SPREAD The crack spread can be expressed using the above contracts in three distinct ways: 1) 1:1 SPREAD This spread consists of a single contract of CL on one leg and a single contract of one of the refined products on the other. This spread helps traders to express their view on the relationship between single type of refined product against crude oil. It is useful when price of one of the refined products diverges from crude oil prices. 1:1 spread is also useful when there are distinct conditions affecting each of the refined products. 2) 3:2:1 SPREAD This spread consists of (3 contracts of CL) on one leg and (2 contracts RBOB + 1 contract of ULSD) on the other leg. The entire position thus consists of six contracts. It assumes that three barrels of crude can be used to create two barrels of RBOB and one barrel of HO. This trade is better at capturing the actual refining margin. It is commonly used by refiners to hedge their market exposure to crude and refined products. 3:2:1 spread is used by investors to express views on conditions affecting refineries. 3) 5:3:2 SPREAD Spread consists of (5 contracts of CL) on one leg and (3 contracts of RBOB + 2 contracts of heating oil) on the other leg. This spread captures the actual proportions from the refining process. However, it is much more capital-intensive. FACTORS IMPACTING CRACK SPREAD Seasonality, supply-demand dynamics, and inventory levels collectively impact crack spreads. Seasonality Mint Finance covered seasonal factors affecting crude oil prices in a previous paper . In that paper, we described that crude seasonality is influenced by variation in refined products demand. In summer, gasoline demand is higher, and, in the winter, distillate demand is higher. Seasonal price performance of the three contracts is distinct leading to a unique seasonal variation in various crack spreads. Summary performance of the three spreads is provided below. Chart: Seasonal price performance of Crude, its refined products, and their spread (excluding years 2008, 2009 and 2020 in which extreme price moves were observed) Refiners strategically time their operations based on seasonal trends, ramping up refinery capacity ahead of peak demand in summer and winter. This involves building up inventories to meet anticipated high demand. However, this preparation often results in a narrowed spread just before peak utilization. As the spread reaches its lowest point, refiners take capacity offline for maintenance. Subsequently, crack margins begin to expand as refined product supplies dwindle, aligning with decreased crude oil consumption. This results in a gradually increasing spread through high consumption periods. Supply/Inventories Supply and inventories of crude oil and refined products influence crack spreads. When inventories of refined products remain elevated, their prices decline narrowing the spread. When the production and inventory of crude oil is elevated, its price declines leading to a widening spread. On the contrary, low inventories of refined products can lead to a wider crack spread and low inventories of crude oil leads to a narrower crack spread. Demand Refinery demand has a self-balancing effect as higher refining requires higher consumption of crude which acts to increase crude oil prices. Demand for crude oil and refined products is broadly correlated. However, there are often periods when demand diverges on a short-term scale. Economic activity and available supplies drive demand for refined products. During periods of high economic growth, refined product consumption is robust pushing their price higher. Demand for refined products can precede or lag demand for crude oil from seasonal as well as trend-based factors. This lag can be identified using the crack spread. Sharp moves in crack spread pre-empt moves in the underlying which act to normalize the spread. CURRENT CONDITIONS There are two trends defining the crack spread currently: 1) Divergence in demand & inventories of gasoline and distillates: Low demand for gasoline is evident due to expectations of an economic slowdown while gasoline inventories remain elevated. Though, distillate consumption remains high as inventories are declining and lower than the 5-year average range. Chart: Divergence in inventories of distillate and gasoline (Source – EIA 1 , 2 ). Moreover, inventories of gasoline and distillates are higher than usual. Both factors together have led to a gloomy outlook for refined product demand. Gasoline stocks have started to increase while distillate stocks are still declining. When refined product inventories are elevated investors can position short on the crack spread in anticipation of ample supply. Conversely, if refined product inventories are low, investors can position long on the crack spread. Chart: Divergence in refined product inventories in US (gasoline rising and distillate declining). 2) Declining crude price and tight supplies: In September, Saudi Arabia and Russia announced supply cuts extending into January. Globally, this led to a supply deficit of crude oil. Supplies of crude in the US was particularly stressed as refiners increased utilization to build up inventories while margins were high and exacerbated by a pipeline outage. Chart: Crude Oil inventories in US have stabilized in September and October. Following increase in oil prices, refining activity has slowed, and supplies have become more stable. When inventories of crude are stable or elevated, it indicates less demand from refiners. Investors can opt to position long on the crack spread anticipating ample crude supply. Chart: US Refinery Utilization and Crude Inputs have slowed in October. Although, crude oil supply cuts from Saudi are going to continue until January 2024, there is no longer a deficit as consumption has slowed down. Together, both trends have caused a sharp collapse in the crack spread. Value of the 3:2:1 crack spread has declined by 50% over the past month. Prices of refined products have been affected more negatively by low demand than crude oil. Inventories and supply situation for refined products is more secure than crude oil. Still, seasonal trends suggest an expansion in crack spread once refined product inventories start to be depleted. HARNESSING GAINS FROM CHANGES IN CRACK SPREAD Two hypothetical trade setups are described below which can be used to take positions on the crack spread based on assessment of current conditions. LONG 3:2:1 SPREAD Based on (a) sharp decline in crack spread which is likely to revert, and (b) seasonal trend pointing to increase in the crack spread, investors can take a long position in the crack spread. This consists of: • Long position in 2 x RBF2024 and 1 x HOF2024 • Short position in 3 x CLF2024 The position profits when: 1) Price of RBOB and ULSD rise faster than Crude. 2) Price of Crude declines faster than RBOB and ULSD. The position looses when: 1) Price of Crude rises faster than RBOB and ULSD. 2) Price of RBOB and ULSD declines faster than Crude. • Entry: 63.81 • Target: 79.12 • Stop Loss: 55.73 • Profit at Target: USD 45,930 ((Target-Entry) x 1000 x 3) • Loss at Stop: USD 24,240 ((Stop-Entry) x 1000 x 3) • Reward/Risk: 1.89x LONG 1:1 HEATING OIL SPREAD Based on relative bullishness in distillate inventories plus stronger seasonal demand for distillates during winter, margins for refining heating oil will likely rise faster than gasoline refining margins. Focusing the expanding crack margin on a 1:1 heating oil margin spread can lead to a stronger payoff. This position consists of Long 1 x HOF2024 and Short 1 x CLF2024 . The position profits when: 1) Price of ULSD rises faster than Crude. 2) Price of Crude declines faster than ULSD. The position will endure losses when: 1) Price of Crude rises faster than ULSD. 2) Price of ULSD declines faster than Crude. • Entry: 36.15 • Target: 42.79 • Stop Loss: 32.3 • Profit at Target: USD 6,640 ((Target-Entry) x 1000) • Loss at Stop: USD 3,850 ((Stop-Entry) x 1000) • Reward/Risk: 1.72x KEY TAKEAWAYS Crack spread refers to the gross processing margin of refining (“cracking”) crude oil into its by-products. Refined products RBOB and ULSD can be traded on the CME as separate commodities. Both are representative of demand for crude oil from distinct sources. There are three types of crack spread: 1:1, 3:2:1, and 5:3:2. a. 1:1 can be used to express views on the relationship between one of the refined products and crude. b. 3:2:1 can be used to express views on the refining margin of refineries. c. 5:4:3 can give a more granular view of proportions of refined products produced at refineries but is far more capital-intensive. Crack spreads are affected by seasonality, supply, and inventory levels of crude and refined products, as well as demand for each refined product. A low-demand outlook for refined products of crude is prevalent due to expectations of an economic slowdown. MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
NYMEX:RB1!Long
by mintdotfinance
12
Oil, where are you headed? This week our eyes fall on the crude oil market. From our previous article, Cracking the Crack Spread , we know that crude oil and gasoline hold a special relationship. Since gasoline is extracted from crude oil, the spread between the two futures should not diverge too much. Yet, in the past few weeks, we have observed a deviation in their prices with the Crude Oil/Gasoline ratio peaking. Futures Fundamentals Open interest refers to the number of open contracts in the market. It serves as a measure of liquidity, activity and more importantly, interest in the security. While trading volume refers to the number of contracts traded each day. The decline in both prices and open interests indicates the liquidation of long positions. Together with a low trading volume, this can indicate a bear market. Economic Outlook Although the federal reserve (Fed) is likely done with its hikes in this hiking cycle, it intends to keep interest rates higher for longer. Coupled with continued tightness in the labor market, sticky inflation and inflating cost of debt, growth would be dampened. One way to back up this view is to look at the US Purchasing Managers’ Index (PMI). The PMI is widely used as a leading indicator to anticipate changing economic trends. Furthermore, there tends to be a positive association with PMI and commodities year-on-year change. Given the latest PMI value, it points to a negative economic outlook, with year-on-year crude oil prices playing catch up. It is good to be mindful that if the Fed has indeed concluded its hiking cycle, there is a greater likelihood for the dollar to weaken rather than strengthen. As crude oil is quoted in USD, a weaker dollar would lead to a more expensive contract. Therefore, there are upside risks to crude oil prices. Supply Factors US crude oil production reaches record high levels. In conjunction with other non-OPEC countries’ record production, they have been upholding the supply despite facing cuts from OPEC. This could possibly explain why oil prices fell on Oct 4th when OPEC confirmed its cuts until the end of the year. However, we also see the number of oil rigs in the US on a decline, which may hinder any higher levels of production. Also, there is the debate whether production from non-OPEC countries will be outpaced by OPEC’s cut, leading to the materialization of a supply deficit. Volatility Historically, the energy sector is known for its volatility. In comparison to the S&P 500, crude oil appears to be more volatile. In the chart above we look at the maximum year-on-year change in the S&P500 and marked that range on the year-on-year crude oil prices. Here, the wider range that crude oil trades becomes much more obvious compared to the S&P 500. This effect could likely stem from the fact that oil, unlike equities, is affected by a myriad of complex factors at any given time, from supply/demand to geopolitical, environmental and many more. Gold and crude oil tend to be positively associated. Rising oil prices place upward pressure on inflation leading to precious metals to appreciate as investors flock to “store of value” assets. Other than store of value, gold also acts as a form of safe haven asset, where investors take shelter in gold against uncertainty. With gold now trading significantly higher than oil, it appears that markets are expecting higher levels of fear and uncertainty, which could translate to higher volatility in oil. So where is oil heading? Here we find ourselves in a limbo, considering potential breakout risk from geopolitical tensions the downside risk from the likely turnover of the economy, a fading PMI pointing to oil weakness, and overextended oil prices when looking at the spread complex with gasoline. In times like this, when risk could extend on either side, a long straddle options position could allow us to harness profits in the event of a volatile move, in either direction. To express our view, we can set up long straddle position by buying one at-the-money call and put option that expire in Feb 2024. Given the last price of CLZ3 is 82, we will purchase the two options at the strike price of 81.50. The premiums for the call and put options are 5.39 and 4.89 points respectively. In total, our premium would be 10.28 points. As a rough gauge of the potential for profitability, it might help to look at the volatility in oil prices. For the selected strike, ignoring the effects of options Greeks, the price on expiration would have to move roughly 12.7% in either direction. In the chart above, the bottom figure shows the rolling 3-month change in oil prices, with the red band marking the 12.7% higher & lower range. Here we see oil continually swinging past this level, highlighting the potential for this strategy to play out. In this setup, it should also be noted that the maximum loss on the position is the premium paid on the initial setup, which is 10.43 points. The breakeven levels are above 92 or below 71 on option expiration day, as seen in the chart above. Each 0.01 point move in crude oil options is for 10 USD. CME also has a handy strategy simulator allowing you to construct the option strategy and simulate future prices on your position's P&L. Above are two potential scenarios if the price of crude oil remains close to flat on expiration day, or if it trades lower on expiration day, alongside a diagram showing the effect on the option position's P&L. The charts above were generated using CME’s Real-Time data available on TradingView. Inspirante Trading Solutions is subscribed to both TradingView Premium and CME Real-time Market Data which allows us to identify trading set-ups in real-time and express our market opinions. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com Disclaimer: The contents in this Idea are intended for information purpose only and do not constitute investment recommendation or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. A full version of the disclaimer is available in our profile description. Reference: www.cmegroup.com www.cmegroup.com www.cmegroup.com
NYMEX:CL1!
by inspirante
GASOLINE Excellent short-term buy opportunity.Gasoline (RB1!) is on a minor pull-back on the 1D chart, below both the 1D MA50 (blue trend-line) and the 1D MA200 (orange trend-line). The 1D RSI has been rebounding since the October 05 oversold bottom, something that has done the exact same way the previous two times on May 04 2023 and December 08 2022. Both of those fractals have (so far) similar structure with the current sequence since the September 13 High, and both reached at least their 0.618 Fibonacci retracement level on those rebounds. As a result, we are taking advantage of the current pull-back to get a more comfortable low risk buy and target 2.500 (marginally below the 0.618 Fibonacci level). ------------------------------------------------------------------------------- ** Please LIKE 👍, FOLLOW ✅, SHARE 🙌 and COMMENT ✍ if you enjoy this idea! Also share your ideas and charts in the comments section below! This is best way to keep it relevant, support us, keep the content here free and allow the idea to reach as many people as possible. ** ------------------------------------------------------------------------------- 💸💸💸💸💸💸 👇 👇 👇 👇 👇 👇
NYMEX:RB1!Long
by TradingShot
1
GASOLINE: Over the 1D MA50, estabilising the new rally.Gasoline is on a neutral 1D technical setting (RSI = 51.588, MACD = -0.026, ADX = 46.131) as it only crossed over the 1D MA50 on Monday. That was after a 3 week consolidation between the 1D MA50 and the 1D MA200, which held and kept the price over the bottom of the long term Channel Up. We consider this breakout as the final confirmation of the new rally to the top of the Channel Up. Buy and aim at a rise close to +30% (TP = 3.200). ## If you like our free content follow our profile to get more daily ideas. ## ## Comments and likes are greatly appreciated. ##
NYMEX:RB1!Long
by InvestingScope
RBOB Gasoline FuturesGood morning, I have traded this for the last 15 years, I am 14-1 on this trade, has a high probability of success. Time Frame is 8/2-8/19. The initial "crash and return to mean" is due to the seasonal demand consequence of the market. Low margin req, calender spreads would be a good option, I will let you figure out the set up as I can't give everything away. Entry can be tricky as, 80% of the trades in the last 15yrs have been initiated on 8/2, the other 20% on 8/3 to 8/4. After analyzing the trades the best equity option for this trade is usually realized between 8/8-8/11 (15yr average best entry range) as an entry and it varies however that is why you need to be monitoring this extremely boring trade. Exit will be on 8/16->8/18. Now the other issue is the open interest on the September contract, if you will be going that route on the front or back end, as it will exit quickly between this exit timeframe so do not hesitate to offset contracts a little early as 42,000 barrels of gasoline showing up at your house is not part of the plan. Be diligent on this trade as it has a high success rate however there are some hidden pitfalls in this trade. "No sleep and I sound like a suit again, vague, gives hints, and is kinda dumb." -Kewlkat
NYMEX:RBU2023Long
by kewlkat
Cracking the Crack SpreadThe ‘crack spread’ is a term used in the oil industry that refers to the differential between the price of crude oil and the petroleum products extracted from it, such as gasoline and heating oil. The name comes from the process of 'cracking' crude oil in a refinery to produce these valuable products. The spread serves as a measure of refining margin, or profitability, for oil refineries. When the prices of petroleum products are high relative to the price of crude oil, the crack spread widens, and refining margins increase, making it profitable for refineries. Conversely, when the price of crude oil is high relative to the products, the crack spread narrows, and refining can become less profitable or even unprofitable. The crack spread is typically expressed in terms of the ratio between the input (crude oil) and the outputs (refined products). For example, a 3:2:1 crack spread assumes that three barrels of crude oil can produce two barrels of gasoline and one barrel of heating oil. In the futures market, the crack spread can be traded by buying crude oil futures and selling futures in its products, thus locking in the margin between input and output prices. This can serve as a form of hedging against price risk for those involved in the oil industry. This week, we will delve into various factors influencing the crack spread and evaluate their potential impact on the current spread; Geopolitical Concerns SPR Refill One of the key points mentioned when we last covered oil was the potential refills of the SPR which are still pending as an attempt to purchase up to 6 million barrels was abandoned at the last minute. As the drawdown in the SPR continues, it seems inevitable that the Biden administration will have to replenish the reserve, likely pushing oil prices higher due to increased demand. Russia Ukraine escalation The simmering tensions of the Russia-Ukraine conflict leave us wondering if the price of crude oil might escalate further. The ongoing conflict focuses on a key port in the Black Sea. Consequently, this could potentially impact up to 20% of oil exports from Russia. Although most major nations no longer rely on Russia for oil supply, some countries are still buying from Russia. This leads to the concern that such countries might have to turn to the open market to make up for their supply shortage one day. Seasonality Crack falls in the 2nd half of the year Seasonal trends indicate a pattern where the 3:2:1 crack spread declines in the second half of the year. This trend has persisted for 6 out of the past 10 years, with the average decline of 29%. Three of the remaining four years closed flat, with one year ending approximately 20% higher. Economic Growth Current economic growth weak but some soft landing expected The year-on-year GDPs for major economies are trailing their long-term averages, indicating still fragile economic growth as industries and consumers grapple with sticky inflation and high rates. Weak economic growth generally dampens the crack spread, as industries and consumers cut back on spending, reducing the demand for refined products. Currency Interplay Between Dollar, Crude, and Crack Spread The Inverse Dollar and Crude Oil has as long-standing positive correlation up until the Russian-Ukraine Crisis when both Crude Oil and the dollar move sharply higher. As this relationship now begins to normalize again, any weakness in the dollar could provide the fuel for Crude & the Crack Spread to rally again. The crack spread is also highly correlated with Crude Oil outright prices, hence any view on crude oil can also be expressed using the Crack Spread. The crack spread hit an all-time high in June 2022 amidst the Russia-Ukraine tensions. Currently, the spread trades at a higher range relative to the past two decades and seems to face some resistance at the previous all-time high in 2013. On a shorter timeframe, the crack spread appears to be breaking out of a symmetrical triangle to the upside, typically a signal of bullish continuation. With prices slightly dipping, this could present an enticing opportunity. On balance the impending risk of the geopolitical event breaking out as well as the structurally weakening dollar seems to outweigh the seasonality and economic weakness effect. To express our view on the 3:2:1 crack spread, we can set up a long position on the crack spread. This can be set up by buying 2 RBOB Gasoline Futures & 1 NY Harbor ULSD Futures and selling 3 Crude Oil Futures at the current level of 114.5, stop loss at 97 and take profit at 140. The calculation of the 3:2:1 crack spread should also be noted as: (2 * RBOB Gasoline Futures + 1 * NY Harbor ULSD Futures ) * 42 – (3 * Crude Oil Futures). The factor 42 is multiplied to the RBOB Gasoline Futures and NY Harbor ULSD Futures as the two are quoted in USD per gallon, this converts the price quotation in Barrel terms, which is the same as Crude Oil Futures. The charts above were generated using CME’s Real-Time data available on TradingView. Inspirante Trading Solutions is subscribed to both TradingView Premium and CME Real-time Market Data which allows us to identify trading set-ups in real-time and express our market opinions. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com Disclaimer: The contents in this Idea are intended for information purpose only and do not constitute investment recommendation or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. A full version of the disclaimer is available in our profile description. Reference: www.eia.gov www.cmegroup.com www.cmegroup.com www.cmegroup.com www.cmegroup.com
NYMEX:RB1!Long
by inspirante
2
WTI: Crude Oil May Have Bottomed OutNYMEX: WTI Crude Oil ( NYMEX:CL1! ), Micro Crude Oil ( NYMEX:MCL1! ) The talk of inflation deceleration created a wishful misperception. Does a CPI read from 9.1% to 4.0% mean price relief for consumer? Certainly not. Something costed $1 last year will go up to $1.04 this year on average. What really comes down is the rate and the pace of price increase, but the absolute price level has forever gone up. This makes the real decline in energy prices more extraordinary: • On June 23rd, WTI crude oil ( NYSE:CL ) August futures settled at $69.16 a barrel. This is 44% below last June’s high of $123.70; • At $2.44 a gallon, RBOB gasoline futures ( SIX:RB ) declined 34% year-over-year; • At $2.37 a gallon, ULSD diesel futures ( EURONEXT:HO ) price dropped 45% YoY. • At the retail level, the American Automobile Association reports the national average regular gasoline price at $3.57 a gallon on June 25th, down 27% YoY; • The AAA diesel price is now $3.89/gallon, falling 33% YoY. However, the era of low energy prices may be coming to an end. I am convinced that the market dynamic has changed. Elevated geopolitical tension, higher demand and a weak dollar could help pull crude oil out of the bottom, and onto an upward trajectory. Global Tension Forms Solid Price Support A week after the start of Russia-Ukraine conflict in February 2022, Crude oil futures shot up 30% from below $90 to $115. WTI peaked at $121 in June as the fighting continued. Since then, high inflation and rate hikes raised the risk of global recession. As the demand outlook dimmed, oil price lost support and trended down in the past year. Geopolitical tension may have been placed on the back burner, but it never went away. Last Saturday, the Russian private army Wagner Group mounted a short-lived rebellion against the Kremlin. What this means to the Ukraine conflict and the stability of Russia itself remain to be seen. Geopolitical crisis could cause supply shock and raise the price of crude oil. My observation is that global tension will be at an elevated level throughout 2023 and 2024. Oil Demand is Expected to Recover Last July, I called the peak of gas price in this report. I discovered that record $5 gas had caused demand to fumble. AAA gas price surprisingly declined at the start of the traditional summer driving season. Things look different now. Retail gas price creeped up 50 cents (+13%) since December. Many stations popped up gas price ahead of the July 4th holiday. With a still strong job market and inflation in check, consumers are taking their summer vacations. A second key demand factor comes from the US government. The Biden Administration has drawn down the Strategic Petroleum Reserve (SPR) to fight high oil price in the last two years. The Energy Information Agency data shows that the SPR holds 350 million barrels of crude oil as of June 16th. This is 285 million barrels less than the level on January 24th, 2020, the week when President Biden first took office. SPR is now at a critical four-decade low level. The Department of Energy has begun replenishing the SPR. It announced buying up to 3 million barrels in May, and recently planned additional purchase of 6 million in August. Thirdly, the risk of global economic recession is now lower than what we previously feared. This is my most important reason for raising the outlook of future oil demand. • The Federal Reserve implemented ten consecutive interest rate increases since March 2022. US inflation rate has declined from the peak of 9.1% to 4.0% in May. Lowering inflation may have averted the US economy from falling on a hard landing. • The banking failures, from Silicon Valley Bank to Signature Bank, First Republic, and Credit Suisse, have met with swift government rescue efforts. We have so far managed to contain these from spreading to systemic risk. • The resolution of US debt ceiling crisis helped avoid a US default and a likely global financial crisis it may trigger. According to the USDebtClock.org, the US national debt is now $32.1 trillion, which is $700 billion more than the previous debt limit. • The Biden-McCarthy deal in federal spending limits ensures that government budget will not be cut. The federal government accounts for one quarter of the US economy. As bad as it may sound, government spending spree with borrowed money does contribute to near-term economic growth. We just kick the can forward and leave the debt burden to future generations. A Weak Dollar Supports Higher Oil Price Last year, the main investment theme of global commodities market was “Strong Dollar, Weak Commodities” and “High Rate, Low Price”. We are now in a reverse course. The US dollar index peaked at 114 in last September. While the Fed raised rates aggressively, other countries were slow in response, resulting in widening interest rate spreads between the US dollar and major foreign currencies. Since then, the Fed reduced the size of rate hikes from 75 bp to 50 and then 25, while UK and ECB caught up with bigger rate increases. The dollar index has fallen to 100 by April. The Fed paused rate increase in its June meeting. Although it emphasizes in fighting inflation, there is no question that the monetary tightening cycle is now in its last stretch. NYMEX WTI Crude Oil Futures With the key factors discussed above, plus the OPEC having incentive to cut output, I could see WTI going back to the $80-$90 range. December WTI (CLZ3) currently quotes $69.1 a barrel. Each contract has a notional value of 1,000 barrels. Margin requirement is $5,000 to place one contract. Hypothetically, if Dec futures goes up to $80, one long contract would gain $10,900 (=10.9*1000). Theoretical return would be +118% (=10,900/5,000-1), excluding transaction fees. The risk of long WTI is falling oil price. If CLZ3 falls to $65, a long position would lose $4,100. This would result in a Margin Call, with the Exchange requiring the trader to deposit fund and bring the account balance back to $5,000. Alternatively, we could consider the Micro Crude Oil Futures ( CSE:MCL ). Contract size is one tenth of the standard CL contract. And so is the margin requirement. Everything else works the same. Happy Trading. Disclaimers *Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services. CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com
NYMEX:CL1!Long
by JimHuangChicago
22
The Downward Trajectory: Understanding Weak Oil Market DynamicsOil looks weak. It seems extremely weak, mainly because production hasn't come down. Chinese demand is still low and might never reach its ATHs, but this, along with the US refilling its SPR, can potentially send higher oil prices. However, this is unlikely to happen before the market takes out this quadruple bottom. Until all the lows are swept, and potentially until the market trades at 43-55$, it's unlikely to see oil go up. Only those prices will make OPEC+ cut production and have 80+ as its target. Until many of these member countries feel pain, it's unlikely that oil will trade above 80$ without some other geopolitical shock. Again, oil can trade higher, but for now, the target is 60.6$, and potentially 54.2$ is next. We can look for potential longs toward 85-100$.
TVC:USOILShort
by BitcoinMacro
1
GASOLINE futures fall to 5-week low on low demand,high inventoryGasoline futures have dropped to a five-week low of $2.6 per gallon, primarily due to an unexpected increase in inventory and a decline in demand. Recent data from the Energy Information Administration (EIA) indicates a decrease in gas demand from 8.936 million to 8.519 million b/d last week. Moreover, the total domestic gasoline stock has increased by 1.3 million bbl, while markets had anticipated a draw of 1.267 million. Additionally, WTI crude prices have been falling since hitting a five-month high in April, amid concerns that a slowdown in global growth could dampen fuel demand. Furthermore, OPEC+ has announced a surprising reduction of output by 1.6 million barrels per day for the remainder of 2023, which may further impact fuel prices. From a technical standpoint, the current price is within a bearish flag on a short continuation pattern. The next potential support area is at $2.0 If the price breaks the dynamic trendline of the channel, we may witness a further drop in gasoline prices.
NYMEX:RB1!Short
by FOREXN1
9
OPEC Output Cut Reignites Inflation SurgesNYMEX: WTI ( NYMEX:CL1! ), RBOB Gasoline ( NYMEX:RB1! ) Over the weekend, eight OPEC producers, led by Saudi Arabia, announced intentions to cut oil production by 1.16 million barrels per day through the end of the year. This adds to Russia’s existing plan to trim 500,000 barrels from February level, bringing the combined voluntary cuts of OPEC+ members in excess of 1.6 million barrels per day. This surprise announcement is a supply shock and pushes oil price to its highest level in a month. On Monday. NYMEX WTI May futures contract opened at $80.1, up 6.1%, while refined products Heating Oil (HO) and Gasoline (RB) went up 2% and 3%, respectively. Oil price hike adds to the risk of global economic slowdown. COMEX Gold is up 1% to $2,002. For a thorough analysis on gold, please read my recent writing: Oil Price Elasticities and Oil Price Fluctuations Crude oil is an inelastic commodity. When oil price goes up, the resulting decrease in demand will be less, in percentage terms. In a 2016 research paper, Fed economists found that the short-run oil supply elasticity is about 0.1 and the oil demand elasticity is about −0.1. They also found that oil supply shocks are the main driving force of oil market movements, accounting for 50 and 40 percent of the volatility of oil prices and oil production, respectively. (Source: “Oil Price Elasticities and Oil Price Fluctuations”, Caldara, Dario, Michele Cavallo, and Matteo Iacoviello (2016), International Finance Discussion Papers 1173.) Let’s illustrate this point mathematically: • Given: Revenue = Sales X Price, assuming sales = demand • When price goes up 6%, sales would change by -0.1 X 6% = -0.6% • New Revenue = (1+0.06) Price X (1-0.006) Sales = 1.05364 (Price X Sales) • The percentage of change in oil revenue is +5.4%. The economic reason behind the OPEC decision: 1) Supply shock pushes oil price up; 2) Higher price and lower production result in higher oil revenue. This explains why the US has difficulty persuading OPEC to increase production. It runs counter to their core economic interest. Investment Strategies in an Inflationary Environment US consumer price index (CPI) rebounded 0.4% and 0.5% in the first two months of 2023. Annual inflation for energy products: Gasoline (-2.0%), Fuel Oil (+9.2%), Electricity (+12.9%) and Piped gas service (+14.3%). Oil price surge raises energy cost globally, from transportation and utility to the cost of most goods and services. This adds to the uncertainly of central bank monetary policy. According to CME FedWatch, futures traders put 44.6% odds of no rate hike in the May FOMC meeting, and a 55.4% chance of raising 25 basis points. This is like flipping a coin. However, there are opportunities on energy futures, if current price trend continues. WTI Crude Oil (CL) Since last year, the Biden Administration released 180 million barrels of crude oil from the Strategic Petroleum Reserve (SPR) to fight record gasoline price and runaway inflation. According to US Energy Information Administration (EIA), crude oil stock in the SPR stood at 371.6 million barrels at the end of January. This is the lowest level since 1984. In a few weeks, the peak summer driving season will be here. This, coupled with the need to replenish the SPR, forms a strong demand basis for the remainder of the year. With demand being inelastic and the OPEC having incentive to cut output further, I could see WTI going back to the $90-100 range. July WTI (CLN3) is currently quoted $80.0 a barrel. Each contract has a notional value of 1,000 barrels. Margin requirement is $5,500 to place one contract. Hypothetically, if July futures goes up to $90, a long position in one July WTI contract would gain $10,000 (=10*1000). Theoretical return would be +81.8% (=10,000/5,500-1), excluding commission. RBOB Gasoline (RB) On April 3rd, American Automobile Association (AAA) reports that national average retail price for regular unleaded gasoline is $3.506 per gallon. This is up 6.7 cents or +1.9% from a week ago, and +11.6 cents or +3.4% from a month ago. Current price is 68.6 cents or 16.4% below year-ago price of $4.192. However, with less supply and more demand on the horizon, I expect gasoline to retest the $4 level soon. July RBOB (RBN3) is quoted $2.6575 a gallon. Each contract has a notional of 42,000 gallons. Minimum margin is $6,500. If futures price goes up to $2.9, a long position would gain $10,185 (=0.2425*42,000). Theoretical return would be +56.7% (=10,185/6,500-1). Heating Oil (HO) Heating oil price peaked during cold winter season in January. While it is a refined product, the cost of crude oil has less impact on heating oil in off-peak season. Therefore, I do not see much upside potential from current price level of $2.6665/gallon. Henry Hub Natural Gas (HH) OPEC’s output cut has no direct impact on natural gas supply. Today, HH futures went down 11.7 cents to $2.099 per 10,000 MMBtu, or -5.23%. In the U.S., about 50% of the electricity is generated from natural gas, with the remainder coming from coal and renewable energy sources. CBOT Corn Futures (ZC) Currently, up to 40% of US corn output is used to produce ethanol, a form of biofuel. Oil price surge would boost the consumption of the lower-cost ethanol, holding everything else equal. I will write a separate paper on Corn futures next month. Happy Trading. Disclaimers *Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services. CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com
NYMEX:CL1!Long
by JimHuangChicago
1
Crude Oil Continues To Slide Downward - $55~65 on target.Did you follow my research from late October/early November? So many people thought Crude Oil would climb higher on supply concerns (related to Winter/Europe). But here we are sliding below $75 (soon) and targeting the mid-$60s. My call from October was that we may see $64 to $67 as a base. Now, I'm thinking we may see $54 to $57 as a base. What is going to prompt demand for Oil when the world is struggling with post-COVID inflation and the US is in the early stages of a moderate recession? The post COVID commodities recovery phase pushed Crude well above $110 for a while, but now we are starting to transition back to "normal" in terms of true supply/demand. In my opinion, Crude will settle between $55 ~ $65, then attempt to find some support. Follow my research.
NYMEX:CL1!Short
by BradMatheny
2
The reasons why going long oil is the best trade you can take!In my opinion, the global energy crisis isn't over; hence there are many reasons why being bullish on oil makes sense, and in this idea, I will try to analyze most of them one by one. First of all situation between Russia-Ukraine doesn't look any good, and it also heavily affects Europe, which is essentially directly involved in this war. Currently, gas from Russia to Europe is lost and can't be replaced because Russia has cut flows while someone sabotaged the gas pipelines. At the same time, Europe is about to ban Russian oil from being sold to Europe while also trying to apply price caps on oil and natural gas. All these essentially increase the oil demand (to replace natural gas) while also decreasing production in case Russia cannot sell that oil to somebody else. As if these aren't enough, as many foreign oil companies managing the production have left Russia, its oil production could drop even more as they don't have the knowledge and ability to control the oil fields themselves. The oil prices remain under control simply because the US keeps releasing oil from its SPR while China keeps pursuing its zero Covid policies. The US eventually will have to stop releasing oil from its SPR because the SPR was created for an emergency, not to keep prices low to buy votes. Not only will the US have to stop emptying its SPR, but it will also have to refill it. Also, China will eventually realize its futile attempt to contain omicron and stop its lockdowns. Essentially just the combination of the two would be an incredibly bullish development for the price of oil, as a lot of supply would come off the market. At the same time, demand will increase massively as Chinese citizens want to travel and consume more. Unfortunately, the US and the world are pursuing catastrophic policies regarding the energy sector instead of pushing investments into it. The windfall taxes on the energy companies will discourage investors from putting money in while starving companies of cash they could have used to invest in more energy production. At the same time, many rules against the extraction of fossil fuels and nuclear energy production are making things even worse. As if these haven't been enough, the US is also talking about an export ban, which, if implemented, would have catastrophic consequences for the world and the US. It would create a massive imbalance in the oil market, which would already have severe issues due to the European embargo on Russian oil. Recently OPEC+ announced oil production cuts, and the tensions between the US and Saudi Arabia have increased significantly. While the US refuses to increase its oil output, OPEC+ cut production by 2 million barrels daily. However, here is the thing... OPEC+ agreed to reduce output that it was not achieving. The truth is that OPEC+ has reached its production limits, and most countries are failing to meet their quotas. There is no spare capacity, and it is tough for them to increase their output. Essentially the cut so far was mostly an admission that they can't produce more. Saudi Arabia and OPEC+ want to keep the price of oil around 80$ and are ready to cut production to counteract the Fed's actions to reduce demand by hiking interest rates. There is an ongoing war been energy producers and Central banks, and the more central banks hike interest rates, the more energy producers will have to cut. Of course, with all the rate hikes and the global economy in a silent depression, we are slowly moving into a brutal recession in the next 6-12 months, which could knock oil prices much lower for a while. However, as central banks are already being forced to pivot, dumping reserves and resuming QE, we could see them and governments trying to stimulate an energy shortage, which could increase oil prices. Finally, the US has talked about refilling its SPR when prices are below 60-80$, while the Saudis talked about cutting production if the prices are below 80$. This means that the price area between 50$ and 80$ is worth going long, as the US and OPEC+ are creating a price floor by reducing supply and increasing demand. So what's the trade? Accumulate oil in the 50-90 area. No stops. Target 250-300$. Time horizon - 2 years.
NYMEX:CL1!Long
by BitcoinMacro
24
Oil Maintains the $90'sOil topped out around $94 after breaking through our target at $92.03. We made a concerted effort for our next target at $95.24, but fell short just below $94. This was a high from the last attempt in early October, and may constitute a double top. We are not seeing a serious retracement, and are still holding the $90's. In order to press higher, we must break through $94 definitively. If support in the $90's does not hold, then $87.21 will likely be a floor price for now.
NYMEX:CL1!Long
by quantguy