Trade Ideas

This week, Research Associate Vincent Wu brings you trade ideas in benzene/MOPJ naphtha and Sing 380 fuel oil.

Firstly, we take a long-positioned view in the differential between Benzene and Asia Naphtha. The spread has sold off in recent weeks on poor fundamentals. As refinery margins get stronger and traders increase short positions in naphtha, we anticipate a reversal in the Benzene MOPJ spread.

Our second idea is to go short in Asia High Sulfur Fuel Oil. Whilst 380 structure has seen a strong performance, technical indicators show an overbought market. What’s more, Singapore is expecting more cargos arriving from Russia, Iran, and the UAE in the coming weeks, which will improve the supply situation.

We discuss these three trade ideas in detail in our weekly Onyx Alpha report. For further information on where you can access this report, kindly contact our sales team: sales@onyxcapitaladvisory.com

This week’s trade idea takes a different format from previous weeks. Today’s edition brings you trades in propane, gasoline and crude.

Firstly, we take a short-positioned view of the front American Mont Belvieu LST propane. LST propane has seen a stellar performance over the past week, supported by a smaller-than-expected build in US propane inventories. However, we now anticipate bearish times for the contract due to a likely significant build in inventories. Supporting this view, we saw LST bids hit in the physical in yesterday’s European window alongside more muted buying in the LST versus Asian FEI propane arb.

Our second idea of the week comes from regional differences in gasoline. We expect bullishness in the gasoline east/west arb due to a continuation of anticipated weakness in European gasoline. We see players stopping out of length in EBOB alongside a shift towards net-long positioning in the gasoline east/west in the front, supporting this view.

Our final idea of the week is to sell Brent/Dubai, which recently rallied to one-month highs due to renewed strength in the North Sea physical and selling in Dubai by Chinese majors. However, we believe this rally is overdone and that there is a good risk: a reward on the downside.

We discuss these three trade ideas in detail in our weekly Onyx Alpha report. For further information on where you can access this report, kindly contact our sales team: sales@onyxcapitaladvisory.com

Onyx Research Analyst Mita Chaturvedi’s trade idea this week is to long US propane.

This week, Onyx holds a long-positioned view on the American Mont Belvieu LST propane, which has recently witnessed significant buy-side traction. The July/August LST spread was supported by buy-side interest in the physical by trade houses. In addition, Monday’s European window saw flat LST prices being well-bid alongside aggressive buying by imports in the propane arb, which takes the difference between the US LST and Asian FEI propane contracts.

The July LST/FEI moved up from -$245/mt a week ago to above -$220/mt on June 11th. The bullishness may have stemmed from an expected rosy fundamental picture ahead of June 12’s EIA stats, where many participants expect propane demand to rise slightly, production to have a small dip, alongside a projected stock buildup of 1.742 million barrels. Should this forecast come to fruition, this stock build would be the smallest weekly increase since the end of April – which would be bullish for the US propane contract.

Looking at Onyx’s market positioning data, we now see a more balanced 7-day split in the July LST contract compared with a 40:60 long:short split in the week to June 3rd. This highlights the recent addition to the contract’s length, and thus cements our bullish view for US propane in the near term.

Onyx Research Associate Vincent Wu’s trade idea this week is to go short in the WTI/Brent spread, which is the differential between the US and European crude benchmarks.

Going into summer, there’s significant potential for supply disruptions, which would be bearish US crude.

La Niña is linked to an increased frequency of Atlantic hurricanes, which would be extremely bearish for US crude should export facilities be disrupted. Combine this with the US’ reliance on exports and the vulnerability of Cushing inventories due to its landlocked nature; a bearish transition would be rapid.

Given the high levels of refinery utilisation at present, should this level get reduced from refinery outages on the back of heatwaves or hurricanes, this would be bearish for demand.

Finally, with money manager sentiment diverging between Brent and WTI futures, a reversal of this sentiment could exacerbate any downwards move. As such, we see good risk/reward in going short in the July WTI/Brent swaps with a price target of -$6.00/bbl. We recommend setting a tight stop loss at -$4/00/bbl, with a bullish reversal in North Sea crude as a condition to exit.

Onyx Research Analyst Harry Nedeljkovic’s trade idea this week is to long July gasnap.

Gasnap – the difference between the European gasoline EBOB and European naphtha contracts – has been utterly destroyed recently. However, the reasons for its weakness seem to be waning, as we expect both markets to reconnect with their fundamentals.

European gasoline demand has completely underwhelmed the market, and there seems to have been little support seen following its huge sell off at the beginning of the month. As refineries came back online last week, long positions were closed, further undermining this strength. With stronger demand figures, stronger RINs and Memorial Day demand figures to come, we expect these low prices to receive healthy buying interest as the market repositions.

Looking at the nap in the gasnap, naphtha has been rallying to levels which seem disconnected from the physical reality. It seems the rally was synthetic, and we’ve seen strong stop outs from short players and US trade houses buying well.

There was strong buying in Euro pronap last week, which could represent them switching to the far cheaper propane. There was also less petchem buying, with it seeming like petchem demand has now been met.

Gasnaph has seen significant long stop outs, with the market saturated short in the Balmo and soon-to-be Balmo June tenors. If we see short stop outs and the re-entry of this length in anticipation of greater summer blending demand, this currently depressed price action could see a roaring reversal.

Onyx Research Associate Vincent Wu’s trade idea this week is to go long in the Q3/Q4 DFL roll.

Recently, the North Sea crude market saw a significant sell-off, with the physical reaching the lowest levels since Covid. Fundamentals have deteriorated on the back of weakening refinery margins, with the physical sentiment diverging from the financial as crude flat price remains supported.

However, with the extreme one-way volatility seen in the market these days, we think there is good risk-reward in going long in the market to the capture the mean reversion; the Q3/Q4 DFL roll best reflects this.

With fickle length washed out of the market, there is more risk capacity for crude to retrace higher. A stronger WTI/Brent spread incentivises less crude exports out of the US, with the Wink to Webster pipeline maintenance supporting this. In terms of arbitrage economics, a weaker Dated/Dubai creates a natural demand outlet from Asia.

We can capture the market recovery by going long in this roll. As this is a contrarian trade, we recommend setting a tight stop-loss in the event of further physical weakness.

Onyx Research Analyst Finlay Gordon’s trade idea this week is; Jun NWE Naphtha Crack.

The June European naphtha crack has already fallen $2/bbl since the start of the month, as the strength from the potential Bull play in May subsided. In turn, price action fell from highs of -$9.50/bbl to print at -$11.50/bbl on open of May 14.

Despite this downward move, positioning for the prompt crack still feels heavy. Funds and banks who were previously buyers of the contract have turned to be the strongest sellers since last week. With flows pointing to the sell side, there is potentially more crack length yet to be sold after the accumulation last month.

Moreover, European CDU refinery margins, the simplest type of refinery which produces straight run products, such as naphtha, remain improved around the $5/bbl mark. Coupling this with the conclusion of refinery maintenance casts a bearish spell for NWE naphtha cracks.

In the past week, we have seen significant net sell side flows across all counterparties, with trade houses net offering 1.25mbbls. In line with this, the Jun 7-day market split is skewed to the sell side at 25:75 on a long:short basis. Notably, the 8-day moving average has recently subducted its 21-day counterpart, portraying another clear bearish signal.

Overall, we believe there are far too many bearish lumberjacks swinging their axes, with players potentially continuing to chop off length, pressuring the Jun European naphtha crack lower.

Onyx Research Analyst Mita Chaturvedi’s trade idea this week is to short June C3/C4 CP.

The C3/C4 CP contract has seen an impressive rally in the prompt over the past week. Price action moved from the negative handles on Apr 26 to flirting with $5/mt by the end of the month. Following a sell-off in the beginning of May, we once again see the spread surge to $5/mt on May 07.
Since butane tends to be more expensive than propane, the C3/C4 CP spread normally trades in sub-zero territory, and we see a disconnect between the current flow and fundamental picture amid this week’s rally. Demand for propane and butane tends to simmer down in the summer. However, we see little reason for propane to outperform butane to this extent.

Onyx’s market positioning data highlights a 50-50 7-day long:short split in the Jun C3 CP, whilst the Jun C4 CP sees a near 80:20 long:short ratio. Hence, we believe that the current rally may have been an implication of strength in other Asian propane contracts, like FEI and low crude. We therefore expect the difference between CP propane and butane to narrow in the coming weeks, and recommend selling the differential.

Finally, we see this view reaffirmed by technical analyses, which show an RSI reading of 72 – signalling overbought territory and indicating that a reversal downwards may be on the cards in the near term.

Onyx Research Associate Vincent Wu’s trade idea this week is to go short in the Q3 EBOB crack.

The gasoline market has seen a strong performance recently; this has helped support refinery margins, with turnarounds also reinforcing the existing backwardation.

US gasoline stocks have seen the fastest drawdown rate in the year to date since 2021, whilst strong demand out of Spain and Portugal has been contrary to seasonal trends.

The market has been overextended with longs looking to take profit, whilst Total have restarted its Gonfreville steam cracker this week. We saw better sell-side interest on Tuesday morning, with funds selling the EBOB crack, whilst majors sold EBOB spreads.

In the Q3 crack, open interest has stagnated, and the market is positioned on the sell-side. These Players include both physical and financial players, whilst refiners have been buying back their hedges. Now, we are looking to capture this short-term market correction.

Our target price is $18.50/bbl, and we suggest a stop of twenty dollars, which is the resistance level of the crack.

Onyx Research Analyst Finn Gordon’s trade idea this week is to long the May gasoline East/West, which means to buy Sing 92 gasoline and sell European EBOB gasoline.

We expect the Asian gasoline benchmark to continue on its charge as it has been well bid, with buying in the spreads particularly strong down the curve in the past week.

It is interesting to note that we have seen some refiners buying the front crack. This could be an indication of these physical players unwinding hedges with the expectation of higher prices. MOC continues to be routinely well bid which helped to push prices up in thin liquidity.

We expect the weakness that began last week in EBOB to continue, as it seems the market is retracing from highs of almost $25/bbl reached in the May contract to $22/bbl now. The weakness in US structure is driving this. The Jun RBBR fell from over $27/bbl on Apr 16 to below $25/bbl the following week.

The strength of the European structure going forward will likely continue to rely on RBBR strength, but US structure seems weaker now; the stronger-than-expected EIA draw was fairly ignored as it did not come from PADD 1 or PADD 3. We have also seen trade houses stepping down to offer EBOB spreads across the curve.

As this is a trending trade there is no need to catch the reversal. However as with all East/West contracts, freight will be important to keep a close eye on.