Trade Idea: Long the May/June DFL Roll

Onyx Research Analyst Mita Chaturvedi’s trade idea this week is to long the May/June DFL Roll. Right now, Dated structure seems undervalued compared to the Brent structure.

While the Balmo Apr/May DFL roll is in contango, the rest of the curve is stronger, showing that the weakness in the North Sea crude market has primarily affected the prompt April structure. The CFD weekly structure is also in contango , with the physical differential which links the paper and physical very low.

At these levels, it seems like there is better risk reward going long Dated vs Brent.

The implied physical differential for the first week of May is around 70c/bbl, indicating potential profitability. Implied physical curve is also improving during the weeks in April, which shows room for improvement in the DFL structure. In addition, there is ongoing hedge buying interest in the back end, which supports a roll up trade like this one.

We are choosing this roll to encapsulate our view rather than the outright DFL, since the DFL leaves significant exposure to Brent spreads. The rolling up of strength is also better shown in the rolls.

We have seen the May/Jun DFL roll rally to 4c/bbl, but this is not a remarkably strong level – which shows there may be further room to roll up.