Tuesday, October 17, 2006

A crude entry

So Kuwait announced today that OPEC plans to cut output by 1 million barrels per day. This announcement, due on Thursday, has been well-flagged. Nevertheless, crude appears to be trying mighty hard to put in a bottom, with WTI back above 60 at the time of writing. Moreover, energy stocks have caught a bid, and the DIA/OIH spread, which was looking like nothing short of disaster last week, closed almost at the entry point on Tuesday. A good thing, too, given the execrable performance of the rest of the portfolio.

Macro Man is not prepared to press his luck on that spread at this point. However, the time appears ripe for another RV trade. Front future Brent is trading well above WTI, a historical anomaly. However, Macro Man believes that this is a temporary phenomenon which is largely reflective of trapped longs in the WTI market. This should correct, though Macro Man does not know when. Therefore, it makes sense to position for a reversion to the historical norm further out the energy curve. Macro Man therefore buys 1000 CLZ7 and sells 1000 COZ7 at $0.07. The target is $2.00, at which point we will re-evaluate. The review level is -1.