Trade Ideas

Onyx Research Analyst Mita Chaturvedi’s trade idea this week is to short the Q4 C3 LST/FEI.

The front FEI has seen some strength from the end of last week, rebounding from a previous flat state and maintaining support to $3.50/mt this morning with good buying from physical and financial players. Balmo spread pricing remains decent at $6/mt, indicating potential upside. There has been 37 kbbls of trade house buying in the last week.

Arb boxes, as in LST/FEI boxes, remain high, suggesting room for FEI spreads to rise. It is also interesting to consider if, flow-wise, spreads may have been artificially depressed with observed good buying from physical players of FEI/MOPJ at low levels, prompting market makers to sell FEI/MOPJ and Jun/Dec FEI.

Looking at the other leg, the US structure appears weak, with bids hit in the physical window contributing to flat price being offered. There appears to be little local demand, and the lack of support from last week’s draw in US stocks shows a pretty pessimistic market – especially as more stock builds are anticipated.

It’s also important to consider the impact of developments in the tensions between Israel and Iran. Not only would any supply disruptions in the Middle East be bullish for FEI (as well as for CP), but any increase in freight rates would likely push the LST/FEI differential lower.

The front of the curve seems to hit strong resistance points with strong major buying; looking at the back of the curve may have better risk/reward. Due to this, our trade idea is to sell the Q4 LST/FEI.

Onyx Research Analyst Finn Gordon’s trade idea this week is to short the May/Jun C3 CP spread. The May/June Saudi propane spread has already fallen $10/mt since the start of the month. With the expectation of lower CP settlement prices gaining momentum, the spread may have more to give before finding a floor.

At the start of this month, Saudi Aramco announced the settlement price for the April C3 CP contract at $615/mt. This was $15 lower than the March settle and below market expectations which suggested an unchanged value. This lower settle sent ripples throughout market sentiment. Looking back to last year, the April settle saw a notable decline of $165 to $555/mt – and this level was pressured lower to settle at $400 for August. After months of strengthening, has this lower settle ignited a chain reaction for lower prices across summer?

The prompt BLPG-1 freight rate remains in high $60/mt handles, which affects the profitability of the route from the AG to Japan. This disrupted arbitrage dynamics last month, with the time charter equivalent much higher out of the US. In turn, if freight sees an uptick to above the $70/mt mark, Saudi Aramco will have to potentially cut prices by a greater amount in order to keep competitive. This lower settle can also be compensated by higher crude prices, which remain above the $90/bbl mark.

Overall, participants will try to avoid being caught by the same surprise which they faced for April, and may look to get in front of a potential lower settle, narrowing the May/Jun spread further.

Onyx Research Analyst Mita Chaturvedi’s trade idea this week is to long the May/June DFL Roll. Right now, Dated structure seems undervalued compared to the Brent structure.

While the Balmo Apr/May DFL roll is in contango, the rest of the curve is stronger, showing that the weakness in the North Sea crude market has primarily affected the prompt April structure. The CFD weekly structure is also in contango , with the physical differential which links the paper and physical very low.

At these levels, it seems like there is better risk reward going long Dated vs Brent.

The implied physical differential for the first week of May is around 70c/bbl, indicating potential profitability. Implied physical curve is also improving during the weeks in April, which shows room for improvement in the DFL structure. In addition, there is ongoing hedge buying interest in the back end, which supports a roll up trade like this one.

We are choosing this roll to encapsulate our view rather than the outright DFL, since the DFL leaves significant exposure to Brent spreads. The rolling up of strength is also better shown in the rolls.

We have seen the May/Jun DFL roll rally to 4c/bbl, but this is not a remarkably strong level – which shows there may be further room to roll up.

Onyx Research Associate Vincent Wu’s trade idea this week is to go short in the summer Q3 EBOB gasoline crack, with a target price of $17/bbl.

The gasoline complex has been a clear winner over Q1, and summer driving season is still on the horizon. US gasoline stocks have seen continuous draws over the past weeks, with inventories at the lowest seasonal level in ten years.

However, cracks have reached a plateau recently – with Q3 seeing resistance at $19/bbl, whilst volatility is on the decline. The market is primed for a short-term pullback; market positioning in Q3 cracks is skewed towards the buy-side, but the 7-day trading split is skewed towards the sell-side. Additionally, open interest has plateaued, diverging from the 5-year average line.

Looking at our counterparty type data, we’ve seen net selling flows in Q3 from both physical and financial players over the past month. Refiners have flipped from buyer to seller and banks have been selling, whilst funds are also net short.

Players are well positioned to take profit, with any bearish headlines providing a liquidity event. In that case, we suggest scaling into the crack to latch on to any bearish momentum.

As this is a contrarian trade, we suggest a tight stop-loss of $19.25/bbl if further refinery outages see cracks break out of their current range.

Onyx Research Analyst Mita Chaturvedi’s trade idea this week is to buy the Q2’24 NWE Jet diff.

The jet diff – which is the Northwestern European Jet minus ICE low sulphur gasoil – sank from nearly $60/mt on Mar 13 to a low just shy of $50/mt on Mar 18. Considering the rangebound nature seen recently in this contract, we believe the diff may have found a psychological support point at these levels.

Fundamentally speaking, European jet demand has been too depressed lately to stand against the oversupply of jet inventories in the ARA region.
However, market participants believe that aviation demand may be on the rise in line with the upcoming summer travel season. In the beginning of February, Europe’s three biggest low-cost carriers reported optimism surrounding summertime air travel.

While open interest remains muted in April – possibly over risk-off sentiment due to the recent jet weakness – we see more interest in the remainder of Q2’24, with open interest in May and June sitting over the five-year averages. While the remainder of the April tenor jet structure remains in backwardation, we see a small contango – which could further induce support for the prompt diff, thus lifting up the Q2’24 tenor.

This is a contrarian trade idea, considering the weakness in European jet. However, with turnaround season starting in Asia, the arb closed from the East and freight levels remaining high, we see possible complications in bringing supply from the East, allowing further bullishness for the Euro jet. We see this supported by technical indicators with the April jet diff’s RSI recently climbing out of oversold territory and still looking upwards- signalling that further bullish momentum may be underway.

If jet supply remains higher than demand in Europe, or if ICE gasoil prices rally further, the jet diff will continue to find pressure. However, considering the more positive sentiment brewing fundamentally in Euro jet and seeing that warmer weather typically brings bearish tides for gasoil, we see good risk/reward in this trade.

The Asian gasoline naphtha differential, 92/MOPJ, has not had a spring in its step since entering March. Prices for the Q2 tenor have fallen from highs of $21/bbl handles on Feb 28 to close just beneath the $19/bbl come Mar 11.
A poorer Eastern gasoline structure, with a weak cash being coupled with a few players swinging a clear sell side axe, saw the front 92 spread come off to 80c/bbl handles. However, with greater buying interest coming from refiners this week, the front spreads could find some support and overall lift Q2 92 structure.

In regards to naphtha, Q2 MOPJ cracks have seen significant support, rallying to close above the -$5/bbl mark on Mar 11. Although, upon the news of mass Ukrainian drone attacks launched against Russia, notably damaging Lukoil’s Norsi refinery, in-the-money longs could utilise this as the perfect moment to take some profit through selling into the news.
In turn, our trade idea for this week is to long the Q2 92 MOPJ contract, with the expectation that these current levels could look attractive again and encourage participants to pick up bids once more.

Onyx Research Analyst Finlay Gordon’s trade idea this week is to long the Mar/Apr Naphtha E/W

Naphtha E/W structure has been battered in the prompt recently, with the Balmo contract falling to single digit territory at the end of last week. Issues at Shell’s Rhineland refinery halted naphtha sales and declared force majeure, causing prompt European cracks to break out of their usual range of between -$9/bbl and -$7/bbl to trade in the -$5/bbl handles.

The long-positioned E/W market has been resilient, rolling their length into later tenors in line with the European Mar/Apr naphtha spread bid to highs of above $20/mt. As a consequence, whilst the more deferred boxes remain in positive territory, the Mar/Apr E/W box has been toasted, falling from flat to -$9/mt over the past fortnight.

Nonetheless, the weakness in March looks to be priced in, which could leave April in a vulnerable position. We have already seen early longs happy to take profit when the front European spread approached the $20/mt mark, and it remains to be seen how much higher the spread can price. In addition, Europe will look to maintain strong pricing in order to pull cracker feed naphtha.

This idea is reinforced when looking at the technicals for the prompt E/W box, with both the RSI and Bollinger bands displaying oversold territory, suggesting the contract is primed for a reversal.
In turn, our trade idea for this week is to long the Mar/Apr Naphtha E/W box, with the expectation that weakness may flow into the April segment and push the box back towards flat.

Onyx Research Analyst Mita Chaturvedi’s trade idea this week is to long the April/May C3 CP.

The soon-to-be prompt April/May CP propane spread saw a significant sell-off, with prices moving from $31.50/mt on Feb 14 to $23/mt come Feb 23. Interestingly, the Mar/April CP strengthened in the same time frame, enabling expectations that the Apr/May spread could also see this support as interest rolls over from March to April.

Considering that CP demand tends to peak around this time of the year, we also find support from a hopeful fundamental outlook. Adding to this, CP spreads tend to be inversely related to crude. Given our expectations of weakness in Brent this week, we may see this add further support to the April CP propane.

Despite the immense selling this week, our cumulative market positioning data shows a short market adding length to the Apr CP with a 7-day market split of 60:40 long:short in Apr and 25:75 long:short in May. We have also seen 410 kbbls of net buying in the outright Apr CP this week.

Much depends on the March CP settlement – which is due to be announced at the end of the month. While we expect a high settlement given an observed trend over the past few months, a low settlement could trigger a bearish reaction to the CP complex. Hence, we recommend keeping a higher entry to current levels to be able to capture the trend upwards.

Onyx Research Analyst Finn Gordon’s trade idea this week is to long the March FEI/CP propane contract.

March FEI/CP has seen a tremendous sell-off since the start of February, falling from over $21/mt on Jan 31 to lows of -$21/mt come Feb 08 Yet, closing prices have stabilised this week around the -$17/mt mark.

Prompt CP saw support on the back of players happy to pile in length due to the stronger CP settlement price. Players were initially seen bidding at sub $600/mt levels. However, with Mar CP now trading around $625/mt, it begs the question whether these players may look to lock in some profit.

This has also been seen in the front CP spread, which has traded from highs of $42/mt on Feb 06 to below $30/mt a week later, implying less faith in March CP. Moreover, with the prompt LST/FEI arb still at -$130/mt handles, importers may still prefer to buy FEI/CP at this relative lower level.

Looking at the technicals, price action has been shadowing the lower Bollinger band for the past fortnight, along with the RSI portraying oversold territory hovering in the low 20’s, suggesting the contract is potentially primed for a reversal.

In turn, our trade idea for this week is to long the March FEI/CP propane contract. Although, a caveat to this trade is freight prices. If freight rates continue to fall, it could be hard for FEI to muster the required strength.

Onyx Research Analyst Mita Chaturvedi’s trade idea this week is to long the Q3’24 Gasnap.

The gasoline leg of this contract has seen a steady and consistent rise over the year so far, and we expect this to continue. This length has been added to a steady bull run, which we expect players to hold on to as the prices roll up.

We have seen both financial and physical players not only buying the EBOB (gasoline) crack in the Q3, but also the gasnap contract specifically. This is especially interesting, as refiners are usually on the sell-side of this contract – and therefore unwinding positions – as a precursor to a further rally.

On the naphtha side, European naphtha flat price has been pushed to very high outright levels, with MOC offered and a lack of real demand at these prices. In addition, AG refineries are coming back online; this will further increase the naphtha, as a waste product of gasoline prioritisation.

This said, we recommend keeping an eye on volatility in this contract and monitoring positioning. If this contract becomes bloated and well in the money, we may see profit taking flows.

Finally, we hold an initial price target of $200/mt. Once this is hit, we recommend a tight trailing stop to protect profit.