HH So You Want To Be Long Oil? Here’s How You Should Do It

Earlier on Friday I said “you just have to laugh.”

And I meant that.

There’s quite a bit of speculation out there that Heisenberg is actually talking his book when it comes to crude. He’s not (if you’ll allow me to refer to myself in the third person).

I’m not short oil, so yes, I can comfortably chuckle when data point after data point (today’s Baker Hughes rig count number being the latest example) of bearish data continues to be met with bullish take after bullish take from seemingly every corner of the investment universe save a few analysts (ABN Amro being one example) who seem to “get it.”

In the post linked above, I brought you Barclays’ take, in which the bank simultaneously calls for increased production from both US producers and OPEC, and higher prices.

If you want an idea of just how bullish some folks truly are, look no further than positioning data. To wit:

long

(Deutsche Bank)

All of this despite the hilariously absurd fact that thanks to record production in the run up to December, the production “cut” deal actually added 1 million barrels/day to an already oversupplied market (see here for that story).

Well needless to say, there are more than a few readers out there who, like the “smart” money and like Barclays, are goddamn determined that I’m wrong and that somehow, soaring US inventories, a hyperactive US shale complex, and a reluctant-to-extend-production-cuts cartel translates into a bullish outlook.

For those folks I bring you the latest from Citi on how best to capture potential upside.

Via Citi

The rush for downside protection which drove the skew sharply steeper has seemed to fade, and investors are now looking to position for wildcard related upside. This is also evident in the change in option open interest, as the increase of calls on the Dec17 contract has outpaced that of puts by more than 50% over the past month, concentrated in the $55-60 strike range (Figure 13). Meanwhile, WTI managed money net length on the CME and ICE exchanges has surged to 422mm barrels, almost 230mm barrels longer than 3 months ago. That of WTI and Brent combined also hit a record of 882mm barrels.

citi

Longer-dated call spreads look more attractive now to express a bullish view. We remain bullish crude oil through the end of 2017 on OPEC production cuts and rising demand, but we may not see a break-out of the recent price range in the near term, with the next catalyst being the OPEC meeting on May 25th, where the current production agreement could potentially be extended. Given the flatter call skew, we suggest investors use call spreads to position for further upside in oil prices, before a retreat of the investor length reignites higher volatility. The risk to this strategy mainly comes from extra strong shale production growth, which could threaten the price rebound.

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