Trade Idea: Short Summer Q3 EBOB Crack

Onyx Research Associate Vincent Wu’s trade idea this week is to go short in the summer Q3 EBOB gasoline crack, with a target price of $17/bbl.

The gasoline complex has been a clear winner over Q1, and summer driving season is still on the horizon. US gasoline stocks have seen continuous draws over the past weeks, with inventories at the lowest seasonal level in ten years.

However, cracks have reached a plateau recently – with Q3 seeing resistance at $19/bbl, whilst volatility is on the decline. The market is primed for a short-term pullback; market positioning in Q3 cracks is skewed towards the buy-side, but the 7-day trading split is skewed towards the sell-side. Additionally, open interest has plateaued, diverging from the 5-year average line.

Looking at our counterparty type data, we’ve seen net selling flows in Q3 from both physical and financial players over the past month. Refiners have flipped from buyer to seller and banks have been selling, whilst funds are also net short.

Players are well positioned to take profit, with any bearish headlines providing a liquidity event. In that case, we suggest scaling into the crack to latch on to any bearish momentum.

As this is a contrarian trade, we suggest a tight stop-loss of $19.25/bbl if further refinery outages see cracks break out of their current range.