Ddchart

I can’t fathom this rally as anything other than short covering/relief rally. There was no positive news yesterday that would have caused the price spike and the underlying factors that caused the May contract to trade negative are still present and are worsening as time goes on.

Actually I think I mis-interpreted your question slightly. The issue with an unhedged short is where are you going to put your stop when the market’s this volatile? Yesterday the spot priced moved over 800 points, if that goes against you and your stop gets triggered you’ll lose way more than you’ll gain from the funding. The reason I use the long future is that you don’t pay funding on futures.

I don’t think it would - the key thing here is I’m trying to reduce exposure to the delta as much as possible whilst capturing the fact you currently get paid to be short spot oil. Because you’d expect far futures prices to be less volatile than the spot, I *think* in the current environment that you can also capture some delta on this trade, ie. yesterday spot dived lower than the July future meaning my short made more than my long, and I was paid the funding credit. At the moment I can’t see spot prices trading above the far future so this could be a way to gain exposure without paying any funding costs. With a guaranteed stop on a long you’ll still pay funding - yesterday I received £30 funding credit so you’d be paying more than that to be long. I don’t see just going long spot oil long term as viable at the moment; appreciate the funding costs change but even if it’s costing you £20 a day to be long, that’s £7,300 per year on a one point contract. Oil would have to be up above 90 a barrel within a year for you to make any money.

I’m currently short spot and long the July future, primarily to take the overnight funding credit on the short position. I realise it’s an imperfect hedge especially as the future gets closer to expiry (when I intend to roll it) so interesting to see how it plays out. You need to be sure you understand the relationship between the spot and far future price and the risk it involves; it obviously also isn’t going to work when the futures are in backwardation.