Tuesday 18, January 2022

Oil catches a huge bid

WTI futures (front month) were up 2.52% today, with a close at $85.93 a barrel. The backwardation now is extremely steep: the March 2028 contract is now trading at around $60.3. To me, this makes no sense. Oil is expensive to store, and nominal interest rates are normalizing. The dire warnings of Mark Carney about oil majors sitting on “stranded assets” are sounding more fantastical by the day. Oil price action is extremely bullish from a technical point of view, which is just feeding into inflation expectations, which is feeding into interest rate futures. Across the curve, from the Eurodollar futures to the Long Bond, futures are being hammered.

This interest rate action makes for a risk-off day, especially for long-duration assets. The NDX was off over 2% today. JPoww will be feeling the heat.

Interest rate options

Implied vol on EUR.USD forex options (well, options on futures, which are the only traded securities I can find which are priced off this vol.) is around 6%. This is up, I’m sure, but still might be cheap if Russia decides to invade Ukraine, or cuts off gas to Germany. I think buying puts on the one-year-out future might be worth a look, but do your own research.