Trade Idea: Short Q4 C3 LST/FEI

Onyx Research Analyst Mita Chaturvedi’s trade idea this week is to short the Q4 C3 LST/FEI.

The front FEI has seen some strength from the end of last week, rebounding from a previous flat state and maintaining support to $3.50/mt this morning with good buying from physical and financial players. Balmo spread pricing remains decent at $6/mt, indicating potential upside. There has been 37 kbbls of trade house buying in the last week.

Arb boxes, as in LST/FEI boxes, remain high, suggesting room for FEI spreads to rise. It is also interesting to consider if, flow-wise, spreads may have been artificially depressed with observed good buying from physical players of FEI/MOPJ at low levels, prompting market makers to sell FEI/MOPJ and Jun/Dec FEI.

Looking at the other leg, the US structure appears weak, with bids hit in the physical window contributing to flat price being offered. There appears to be little local demand, and the lack of support from last week’s draw in US stocks shows a pretty pessimistic market – especially as more stock builds are anticipated.

It’s also important to consider the impact of developments in the tensions between Israel and Iran. Not only would any supply disruptions in the Middle East be bullish for FEI (as well as for CP), but any increase in freight rates would likely push the LST/FEI differential lower.

The front of the curve seems to hit strong resistance points with strong major buying; looking at the back of the curve may have better risk/reward. Due to this, our trade idea is to sell the Q4 LST/FEI.