Something doesn't smell right in the oil markets. Cannot put my finger on it. It "feels" undervalued. I keep seeing in my head... ~$55 per bbl by the spring of 2017. I hope I am wrong on this, and OPEC's waffling is not helping. *sighs*

Hi @SMCJB

Previously you mentioned being open to questions about spreads on this thread. Seeing as discussion has been a lot slower on this thread than in previous months I thought I would ask some questions that you could answer in your own time. I would also love to hear from others that trade energy spreads.


I have heard people say that spreads should be thought of as their own distinct market, separate from outrights, with Joseph Choi also describing it as a way to trade the 'second order derivative'. If you agree with this sentiment, could you suggest ways to start thinking about this area? Both from a contextual and analytical viewpoint?

In Eurodollars I understand that most people will use calendar spreads to express an opinion about the pace of interest rate rises between two points, and use butterfly spreads as a way to take a view on fed 'lift-off' and 'landing' (again taken from Choi). What about in the energy markets? Are you just focused on the current contango/backwardation regime and it's steepness/flatness? Are there other things to consider?

How do fundamentals factor into your decision making process?

I have read many discussions on how best to execute fly's/condor's etc. Using a fly as an example, some state that it's best to use an autospreader to leg into 2 cals as you can capture a tighter spread than you'd pay trading an exchange traded fly. However, others argue that this leaves you open to legging risk and slippage and that it's better to just trade the exchange listed fly. What is your opinion on this and does it vary depending on your level of infrastructure and how price sensitive your strategy is?

Many thanks.

Reading about the issues with the colonial pipeline as well as additional refinery issues in LA (PBF Energy) and Indiana (BP Plc) I was thinking this could be bearish for oil and bullish for distillates in the US.

However, with ongoing OPEC talks I think it would best to focus on distillates. That lead me to look at the RBOB vs HO spread. I think there is some room for RBOB to rally further vs HO but what I found most interesting was the strength of the spread based on seasonal cycles. Normally the RBOB - HO spread would be negative around this time of year but we see continued strength. Based on this, if the pipeline came back online soon enough then would we likely see a sharp sell-off?

@CobblersAwls

Something that may perhaps be of use

ARA Gasoil Stocks Reach Record High | Genscpe

-William

@CobblersAwls I saw your post and will reply soon. I moved this weekend so was offline for four days. I'm back online now but one of my main computers seems to have suffered a hard drive failure, and my wifi isn't working well so difficult for me to use the laptop.

Interesting story...

Mothballing the World's Fanciest Oil Rigs Is a Massive Gamble

Bloomberg:- Mothballing the World's Fanciest Oil Rigs Is a Massive Gamble

SMCJB 

Interesting story... Mothballing the World's Fanciest Oil Rigs Is a Massive Gamble Bloomberg:- Mothballing the World's Fanciest Oil Rigs Is a Massive Gamble

I read that article earlier - great read. Although nowhere near enlightened enough to know how risky this really is, it seems that for now Transocean made the right call, cutting costs to still turn a profit for the year whilst rivals are spending anywhere from 200% to 333% more per day to keep these 'warm-stacked', but if oil prices remain depressed for an extended period of time like we have seen in the past then this could soon get very costly.

Wall Street moved higher on Wednesday after an OPEC agreement to limit crude output fueled a rally in oil and more than offset nervousness about a tight race for the U.S. presidency.

The energy index jumped 4 percent and was set to have its best day since January after OPEC sources said the group has reached a deal to limit crude output at its policy meeting in November. Oil prices rallied as much as 6 percent.

"The energy sector has been the biggest drag on earnings for the past year and a half or two years, and if you can get some stability there, all of a sudden earnings start to look a lot better," said Mark Kepner, managing director at Themis Trading in Chatham, New Jersey.

Chevron climbed 2.66 percent and Exxon Mobil gained 3.56 percent. Shares of Caterpillar Inc, which sells heavy equipment to energy companies, jumped 3.79 percent.

Investors for months have shrugged off the Nov. 8 presidential election, but uncertainty about the election's outcome has taken center stage since Monday's first debate between candidates Donald Trump and Hillary Clinton.

"There is this uncertainty that you don't know which way the election is going to go," said Chris Zaccarelli, chief investment officer at Cornerstone Financial Partners.

U.S. stocks reversed earlier losses and moved higher following news of the OPEC agreement.


Full article on Reuters

Quoting 

The decision at this week’s meeting of the Organization of Petroleum Exporting Countries in Algiers to cut production was necessitated by Saudi Arabia’s tattered finances. The kingdom has the highest budget deficit among the world’s 20 biggest economies, may delay its first international bond issue and now faces fresh legal uncertainty after the U.S. Congress voted Wednesday to allow Americans to sue the country for its involvement in 9/11.

In U-Turn, Saudis Choose Higher Prices Over Free Oil Markets - Bloomberg

They have assets that can be frozen here in the US

-William

Nice analysis, thank you

Side note - blows my mind why folks use ToS when it comes to doing anything with futures



-William