Crude Oil: Elevated upside risk with CTAs max long – TD Securities

TD Securities strategists Ryan McKay and Bart Melek highlight that traders maintain an aggressively long position in WTI Crude, Brent Crude, diesel, and gasoline amid persistent threats to energy infrastructure in Saudi Arabia and Russia. These attacks have created a considerable upside risk premium, as reports indicate that significant portions of the East-West pipeline in Saudi Arabia may remain offline for three to five weeks, with further Houthi strikes adding to tightening risks.

Nonetheless, the only factor currently limiting positioning is vol levels, allowing CTAs to remain maximally long across crude oil, diesel, and gasoline markets. However, should repairs take longer than anticipated, flow rates decrease, or additional attacks occur, the market could face a notable tightening. The current market environment has been comparatively more balanced, with energy flows from the Middle East region accounting for 80-90% of pre-war levels, including Hormuz, the Gulf of Oman, Oman, Fujairah, and Yanbu.

Concurrently, refineries continue to operate at reduced capacity, but the potential for continued attacks limiting supply or a resurgence in refinery runs due to heightened Chinese demand has led to a risk premium being priced into the market.