Crude oil manufacturer’s meeting on Sunday was evidently the major event of the previous two weeks. Before the meeting, the oil price even hit a 2016 high in anticipation of a possible agreement on oil production freeze by main producers.
Nevertheless, the actual outcome of the summit was even less constructive for the oil prices than the previous one (February 2016).
Saudi Arabia somehow strengthened its stance and rejected to commit to oil production freeze and required Iran should be a part of such deal as well. This however was an unlikely scenario from the very beginning.
Still, a failure of producers to reach at least some agreement is a bit of a surprise. The sharp decline in oil price thus seems to be natural consequence of Dauha’s meeting. Despite that, the price of oil (Brent 1M) remains above 40 USD/barrel today in early morning.
We keep our view that oil prices could decline in weeks and months to come. From the fundamental perspective, the oversupply should peak in the second quarter. Although the recent flattening of Brent oil forward curve is a bit worrying, it could prove to be caused by temporary influences (e.g. North Sea maintenance).
On the other hand, recent surge in oil prices mitigated pressures on US shale oil producers and could in fact lead to a slower adjustment of supply side of the market. We therefore perceive the risks to be skewed slightly to the downside.
Subsequently, USD/CAD continue rising to hit at 1.2989 during early European sessions, the session low; the pair afterwards resumes bearish rout.
The pair is likely to find support at 1.2745 levels (38.2% m’ly Fibo, Wednesday’s low and a nine-month low and resistance at 1,2920, Tuesday’s high).
In order to arrest this uncertainty, we advise to purchase 1M 2 lots of At-The-Money -0.49 delta puts and sell 1M one lot of (1%) In-The-Money put option usually in the ratio of 2:1 or 3:2.
The short ITM puts funds to the purchase of the greater number of long puts and the position is entered for no cost or a net credit. The delta of combined positions should be around -0.32 with slightly negative theta value.
The underlying exchange rate has to make substantial move on the downside for the gains in long puts to overcome the losses in the short puts as the maximum loss is at the long strike.
We prefer lengthier time for maturity so as to make a substantial move on the downside.
The material has been provided by InstaForex Company – www.instaforex.com