Flash Note - Closing WTI Calls

Since my note on June 9, oil has made a V-shaped recovery to $81+. The $80 strike WTI calls I recommended first at $2.30, and then added to at $1, were trading $3+ this morning. This is a good area to take profits as the latest positioning data shows that hedge fund and other money manager positions have started to normalize fast. HFs / MMs bought 69 mm bbls in futures and options linked to Brent over the seven days ending June 18. This is one of the largest weekly purchases of oil related contracts over the last 10 years.

Overall positioning is still very light (bottom 15th percentile), but given the sharp increase in positioning, I think the easy money from short covering has been made. It’s now up to supply / demand fundamentals to keep pushing prices higher. Significant inventory draws will be needed over the summer months for oil to have a sustained move higher from here.

On the positive side, OPEC+ export data is showing a sharp drop in recent weeks. On the slightly negative side, US economic data seems to be deteriorating, and China buying remains weak. As we approach US elections, the risk of an SPR release will also increase, especially if WTI rose to $85+. Overall, the risk / reward to bet on oil going from here to $85+ seems less favorable. I’m not making any changes to my E&P and offshore holdings which are a longer-term, core investment.