Thursday, February 26, 2015

WTI Weakness

WTI Crude Oil has diverged massively from Brent Crude, going from a spread of $2 in January blowing out to over $11.  There is a massive glut of oil, and inventory is quickly running out in Cushing, OK.  There are many who still think that WTI is the worldwide benchmark for crude oil, but that hasn't been the case since 2011, when WTI diverged from Brent for good.  The spreads between the two used to be less than a couple of dollars at almost all times.  After blowing out to over $25 in 2011/2012, the completion of a pipeline going from Cushing to the Gulf Coast crushed the spread back down to near zero, but the production must still be overflowing the pipes.

This is massively bearish for WTI, as any weakness in Brent Crude will only exacerbate the technical weakness in that market.  It just so happens that retail investors have piled into USO and UWTI to get crude oil long exposure just at the worst time, with extreme contango, and a WTI/Brent spread that is blowing out.  The contango is at $2/barrel per month.  That is almost 2009-esque.  The inventories are overflowing.  I am expecting WTI to get below $40/barrel sometime in March or April on an inventory scare that storage tank space is running out.  The best risk reward trade I see there is a WTI short on any pops, hopefully we get one at the beginning of March to sell into.  I am waiting eagerly.

On the USDJPY, I am being patient with this one, waiting for a premium entry point to get short, I'd like to get short around 122.

I am back to being bearish on Treasuries with 10 yr yields back below 2%.  German Bunds are trading 0.30%, which is absurd but they just can't get enough of the stuff over there.  S&P is boring here, the bull trend continues, but the music will stop eventually, just so hard to time a top in this ultra bullish market.  But the sentiment is starting to get a bit more frothy out there so I don't see much upside price wise, time wise, it might take a few  choppy vacillations near the top before we go down hard.

10 comments:

douglas gammons said...

Hi, this is a terrific blog.

Market Owl said...

Thanks glad you like it.

Anonymous said...

Market has to go up for bonds to sell off. Simple as that. Look at January bond move when market tanked and look at February bond move when market ramped up.

We need the spy to go to 215. Simple as that and then maybe TLT can go to 120.

In the meantime I'm expecting 10 year yield to be a 2.05 early next week.


TBT long

Ol Dawg

Market Owl said...

I am with you, I think the market grinds higher in early March. I am short Treasuries also.

Anonymous said...

Dumped the tbt 42 april 17 calls bot yesterday at 2.34 at 2.69. I will probably regret it tmrw but i had a good reason. The market was flushing and they may start reallocating to bonds overnight and tmrw. If u think the suspect may have a gone better to shoot then get shot at

Ol dawg

Market Owl said...

I am going to stay short Treasuries into next week. Swing trade for me. Looking for 2.14% on 10 yr yields.

Anonymous said...

This is quite a move on bonds today

Market Owl said...

The bond rally was based on month end extensions buying by institutions. Just index buying, nothing fundamental. Treasuries had no business trading down to 1.94% 10 yr yields.

Anonymous said...

In the first few days of the last week each month institutions managing passive funds buy treasuries? Left 4 gz on the table fuck

Market Owl said...

Unlike stocks, bonds have a set amount of time in existence, and as shorter maturities roll off, the index funds need to add bonds to keep up their durations to follow the bond indices. They usually do this at month end, usually the last few days. Looks like they are mostly complete, although probably some month end extension buying tomorrow.