June Brent traded up with nary a settlement risk to be seen as the contract was taken off the board overnight, while July Brent, the new front month is trading up towards $27 and its discounted cousin, July WTI, moving in on $ 22 as I type.
Lovely bounce off the lows for June WTI this week as the change in the direction of travel reflects traders refocusing on the inflexion point in demand; hence the gradual lifting of mobility restrictions in large economies is helping.
Upbeat remarks from Dr Fauci on testing of Gilead’s Remdesivir added to the bullish day as with anything that helps with returning economies ‘new normal’ to something that resembles old normal is exceptionally bullish for oil markets.
And the EIA inventory data offered up some small hints of encouragement – the crude build, while significant, was a little less than expected; and the gasoline draw was interpreted as a sign of some improvement in demand.
This is a second straight week of inventory and product demand figures suggesting a bottoming of the US market. The crude inventory build of 9.0Mb (plus SPR +1.2Mb) was bullish vs. consensus +10.6Mb and API +10Mb and smaller than the previous weeks.
Technical selling pressures are usually relatively short-lived. And on the first signs that market shorts were losing the upper hand after the colossal oil funds rolled forward, it probably signalled speculative money to move in on front end weakness,
Both WTI and Brent oil front contracts are up, but it is the fall in the contango that is far more interesting, and the fact oil prices along the curve are providing much better price discovery. And should bring investors back. Fingers crossed.
But as June long positions reduce, so does June delivery risk and allows June WTI to trade on a more fundamental scrim. The later is extremely important; it will probably lead more brokers around the world to lift the DNT (do not trade) enforced restriction and bring back more investor interest in spot markets.
Demand has most likely troughed with several large economies now considering ‘exit strategies’ or ‘new normal’ and lifting the draconian lockdown restrictions.
All the while, OPEC+ quotas are due to kick in on Friday, suggesting short term supply conditions have likely peaked. There probably another 3- 5 dollars left in the June tank, which should take us to or through the 20-dollar inflexion point.
This is probably the first time I’ve missed working as a market maker in oil after I decided to retire from running a trading desk in January 2019 to focus on my own commodity and Forex based fund.
Of course, being an algorithmic /quant trader for nearly two decades, I have a completely different view on the goings-on in the front-month contracts, which at times might make for a confusing read, but the trade protocol I ran with after the May 2020 debacle worked to perfection.
With some technical overhang left in WTI, the front-month remains prone to roll on en masse position traders will likely take advantage of narrowing front-month contangos to execute rolls strategies at opportunistic times, especially on the move under $2 forward. This could weigh until long June WTI open interest is low.
However, it’s the battle of the execution algorithms that provide very poor price discovery when the sell-buy risk management protocols are executed. The market makers’ execution engines see theses trade coming a mile away. And the program immediately pulls down their pricing ladders on the first sign of selling momentum, as the machine assumes a tool as given the liquidity conditions no one is going to sell June WTI in size unless they need to.
That could be why we saw a whippy move during the 4 PM London Fix yesterday. Although that time is primarily a currency hedging channel, the London close is also a time for colossal settlement risk across a broad spectrum of assets.
Oil markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp