Trade Idea: Long Q3/Q4 DFL Roll

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.