Trade Idea: Short June C3/C4 CP

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.