Trade Idea: Short Jul WTI/Brent Swaps

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.