donderdag 22 juni 2017

Citi: Here Comes The V-Shaped Rebound In Oil

This afternoon, Citi's commodities team (led by OPEC's impressario Ed Morse) moments ago issued a report according to which crude oil markets will not only bottom, but more importantly, "investors should position now for a potential V-shaped rebound in crude oil prices, as price risk seems asymmetrically skewed to the upside." We digress. Citi explains the recent collapse (which it did not in any way anticipate as it was bullish all the way into a bear market), by noting that WTI flat price has sold off another ~5% this week, as bearish sentiment continued to prevail among oil market participants. However, it counters, "both weekly and monthly storage data are pointing to a tighter market by end-2017, and Citi expects global oil stocks to draw ~200-m bbls to year-end. While it is possible for prices to dip even lower near-term, we do not view this as sustainable, and once market sentiment turns, prices could rally sharply." Some additional observations from uber-bullish Citi on the crude vol surface:
# The flattening of the vol skew has gathered pace. The discount of the 3rd contract’s 25-delta call implied vol to the ATM vol narrowed to ~0.9 vol pts or just ~3%, the smallest in over a year, while the call skew on longer-dated contracts shrank significantly as well (Figure 1)...


Meanwhile, WTI short-dated implied vol remains cheap, despite having bounced off the lows. The negative relationship between implied vol and oil prices has restored after breaking down briefly last week, marked by the 1-month implied vol (OIV) repricing ~4 vol pts higher during the sell-off in flat price to ~32 pts, in line with the current realized vol. While the implied breakeven is back up to $0.86 from just below $0.80, it still looks cheap historically, even compared to the $0.75-1.05 range established in the low vol environment so far this year (Figure 2)...


We do not expect a quick reversal of such dynamics, as muted producer activity as well as stronger consumer hedging demand at this price level should continue to suppress downside vols and support upside vols. Should market sentiment improve, a build-up in investor length, which is near the lowest since last November (Figure 3), could keeps call better bid, too....