Oil - Forward Curve: Long the Front-end, Short the Back

Energy, Industrial/Transportation, Macro


Oil - Forward Curve: Long the Front-end, Short the Back

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Highlights

The forward curve looks like it is heading towards backwardation, and the presenter is long the front-end, and short the back-end at this time. He explained how the Saudis and OPEC appear to have gambled on the market’s reaction to the announced supply cuts, but the Saudis are stuck with a disproportionate share of the cut because other countries are simply not complying. And, the oil price that elicits a supply response is now clear (mid-$50s). With rigs coming back online in the US, the $1.5mm bpd cut will be largely covered by hedged production looking out to 2018, and then the presenter sees incremental rig activity taking the market into a state of oversupply (this the bearish back-end of the curve view). There are a number of ways to play this thesis, including selling calls on the back-end in the $60s. If Oil dropped to $50, he would consider getting long for a trade, because there is a shortage near-term (front-end).

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Commentor 1 - 2 weeks ago

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