Trade Ideas

Onyx Research Analyst Dorian Colas’ trade idea for this week is to go long on the Mar/Apr C3 FEI spread.

The C3 FEI complex saw a poor beginning to 2024 on the back of weak demand from Asia, with the Mar/Apr spread moving from $23/mt at the start of the year to $12/mt a week later. However, with propane demand starting to pick up in Asia, we might see a shift from this bearish sentiment.

In addition, we have the backdrop of geopolitical risk stemming from the tensions in the Red Sea. While we continue to observe LPG vessels pass through the Panama Canal rather than the Red Sea or the Suez Canal, the conflict has impacted other contracts that could influence the soon-to-be-prompt FEI spread. The naphtha East/West, for instance, rallied to highs of around $40/mt this week, due to the Red Sea concerns as well as the drone attacks on Russian infrastructure. Because of this, the FEI/MOPJ sunk to lows of near $-100/mt, which could incentivise Petchem participants to switch from naphtha to propane as feedstock and thus support the C3 FEI.

Technical indicators highlight that the Mar/Apr FEI spread is in neutral territory based on the RSI and Bollinger bands, although the RSI appears to be moving upwards, signalling room for a move upwards. This is further shown by Onyx Counterparty data over the last 7 days seeing trade houses on the buy-side by over 290 kbbls.

We suggest entering long at $15/mt whilst keeping a tight stop to shield against further weakness in the spread.

Onyx Research Analyst Mita Chaturvedi’s trade idea this week is to short the March Dated/Dubai.

Light sweet crude has enjoyed a significant rally over the past two weeks. The Brent/Dubai Exchange of Futures for Swaps (EFS) reached its highest level since late November last week, reflecting the growing tightness in the market for sweet, Brent-linked crudes.

This tightness was further exacerbated by elevated tanker rates and light sweet outages in the Mediterranean, where all barrels are closed due to the ongoing Red Sea situation.

Notably, though, the strength in the Dated market seems concentrated to the front of the curve, with CFDs pricing in prompt physical strength with a strong backwardated structure. A lot of the strength in the physical hinges on the fact that WTI Midland flows from the US have been disrupted, coupled with a Forties pipeline issue. We expect that as these flows return, the tightness will be alleviated and reflected by lower Dated premiums.

With poor demand in Asia, we expect to see less demand for arbing Dated barrels into Asia – despite refinery maintenance in April. The Mar Dated/Dubai contract has contracted below the upper Bollinger band. While still in overbought territory according to the RSI, levels have been retracing lower. We expect this to continue.

We suggest entering short at 55c/bbl and scaling into the trade with a tight stop loss to protect from a retracement higher, should the strength in the prompt Dated market filter further down the curve.

This week, Onyx Research Analyst Pierre-Elie Balsan recommends trading options.

Brent futures have strengthened off the back of heightened geopolitical risk in the Middle East and Houthi attacks on global shipping in the Red Sea that have deterred even more vessels from the Suez Canal route.

Considering the fundamental situation and observing the consequent flows, Onyx research has estimated the volatility using the Garman Klass metric, in which they’ve noted a higher realised volatility that’s still well-contained within a range.

Thus, they recommend selling a Mar Brent strangle, which would comprise of going short a call option with a higher strike price and going short a put option with a lower strike price. This would collect the risk premium that has risen amid the rally in implied volatility.

Onyx Research Analyst Finn Gordon’s trade idea this week is to short the February C4 ENT vs. C3 LST.

US butane had a particularly strong December and is maintaining good form into the new year, aided by the physical being very well bid. This is likely part of a bull play, as butane prices soared well into three-digit territory in the prompt months, despite being neither economically viable nor sustainable for blending with gasoline at this price point.

Prices for February C4 ENT vs C3 LST reached highs of over 30 c/gal on the 4th of January, but price action has since dipped back down to 25 c/gal on the 9th of January. It is expected that butane will continue to be a function of gasoline blending and crackers’ demand, so we believe the US butane propane differential should retrace downwards.

This prediction is supported from a technicals perspective: The RSI recently peaked at 77 on the 28th of December, then displayed an overbought marker of 70 one week later. Additionally, when tracking the 8-day and 21-day moving averages for the prompt contract, the 8-day looks set to subduct its 21-day counterpart.

Considering the above, our trade idea for this week is to short the February C4 ENT vs C3 LST. Since this is an illiquid market, we advise setting a wide stop loss.

Vincent Wu’s trade idea this week is to short the Feb/Mar LST/FEI (the US and Asian propane benchmarks, respectively).

LST saw strong support into the end of December, particularly on Feb/Mar on the back of rapid inventory draws, leading to its lowest level since July. Meanwhile, Feb/Mar LST/FEI also rose above -$10/mt, its highest level since Q2. According to Onyx data, the market is positioned long and in the money, presenting an opportune time for players to take profit and add shorts to LST.

FEI saw weaker performance but appears to have stabilised now, with expectations of higher Chinese PDH demand for 2024. We’d keep an eye on the Panama Canal, as further adjustment of restrictions in either direction could lift or depress the LST/FEI arb.

As this is a contrarian trade, we recommend setting a tight stop loss at -$7/mt, as a breakout above current resistance levels could trigger further stop outs. Our target price is -$20/mt as we aim to capture the mean reversion should prices retrace to their long-term average levels.

Mita Chaturvedi recommends longing the Feb WTI/Brent differential as this week’s trade idea.

We believe there is good risk/reward in going long here. The level is lower than in all years but 2020, which it is closing in on. The options volatility skew for Brent Futures show that players are willing to pay more for downside protection than levels seen in the previous two weeks and far exceed the volatility seen on the upside.

WTI seeing a weekly increase in call volatility shows an increased willingness to pay a little more for upside risk – although it is met with more interest in downside risk too. According to CFTC data, there was an increase in short positions in both Brent and WTI with lacklustre global demand. The net positioning in WTI from money managers has dropped to such an extraordinarily short level that it may be primed for a squeeze.
It is also worth considering the closely correlated relationship between the Dated Brent spreads and the WTI/Brent differential due to the WTI Midland grade of crude setting the Dated curve.

This is a contrarian trade, so we would recommend entering in small quantities until you catch the upward trend and a tight stop once support is seen.

Vincent Wu recommends going long in the Jan/Feb EBOB spread as this week’s trade idea.

Onyx research support this contrarian trade, expecting good risk-reward at lower levels as we anticipate a mean reversion. As the front spread weakens, prices are testing the support level of -$4/mt, which it has previously failed to break through.

With the contango being so deep, these levels provide optionality for physical traders, lending themselves to storage plays. We’ve also seen buyside flows from both physical and spec alike in recent weeks.

For tradecraft, we recommend entering at the $-4/mt level, with a target price of -$2/mt. The stop loss should be tight at -$4.50/mt to manage risk. A breakout below the support level could trigger further stopouts, invalidating our hypothesis.

For this week’s trade idea, Onyx Research Analyst Dorian Colas recommends going long on the Q1 Euro NAPHTHA crack. Citing a recent rise in price that remains overall historically low, we forecast better support this month on the back of fundamentals firming up in both the East and West.

There are strong selling flows in the Q1 East-West as players hedge their physical in anticipation of the term negotiations for cargoes leaving the black sea, and we expect this to continue as negotiations are agreed. However, we expect volatility in Q1 to increase – so set a wide stop loss.

Vincent Wu’s recommendation this week is to range trade the Q1/Q2 MOPJ Spread, the Asia Naphtha benchmark. In light of Naphtha’s seasonal strength, he advises range trading the spread with a bullish axe. The MOPJ spread has been fluctuating and rangebound over the past month between $14 and $18/mt, with an average true range of around $4. Buy the lows and sell the highs, and closely track the twenty-day moving average. The exit condition is to close the trade as the volatility and ATR die down.

This week, Onyx Research Analyst @Vincent Wu recommends going short in the Jan/Feb Sing 0.5% spread.

After supply tightness and Al-Zour refinery issues triggered a bullish reaction from the market, sentiment has flipped to bearish this morning with the news of Al-Zour returning to full operational capacity in a few days. This news has seen Jan/Feb already fall by $2; however, the December market is expected to remain tight. Vincent advises targeting $10/mt while setting a wide stop loss to protect against price swings and maximise bearish trend.