Copper is strong but fully valued, while gasoil and diesel are cheap value
May 7, 2024
Key Observations:
There is not a substantial Mideast war risk premium to remove from spot crude oil prices. Insofar as risk premia have come and gone in oil markets over the past seven months, those driven by the geopolitics of the Mideast conflict have largely priced through options not futures. As of May 6 in NYM WTI, there was a 3-vol put skew in the 25-deltas with implied vols below the long-run normal for ATM across the entire vol surface.
Oil complex is now crude-led not product-led. As we noted on May 2, supply has driven the recent slide in crude prices, namely the launch of commercial operations through an extension of the Trans Mountain Pipeline. This steel enables 890 thousand b/d of Canadian crude supply to reach refineries in British Columbia and Washington State and export terminals for Asian destinations. Nameplate capacity has increased by 590 thousand b/d from the prior 300 thousand b/d.
Retail gasoline price is sliding. U.S. average regular grade price is now $3.64, down 3 cents mtd. There was a comparable slide a year ago: $3.69 (Apr 19) to low at $3.53 (May 8).
Investors still love CMX copper. As of April 30, institutional investors had increased their long side risk to a new record high, lifting net length to the 92nd percentile since 2006. Positioning sets the stage for a reversal, of course; however, a tactical short here is poor risk-reward, in our view, given the improving activity across global factories.
Source: Bloomberg, NYM, AAA, CFTC, Blacklight Research.
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