WTI Crude, What's next? Midterms ahead!
Following my previous play, we see that price is now consolidating in the $101–$106 corridor.
Front-Month backwardation remains high
Remember, cash is king because cash markets cannot be bluffed.
The front-to-second month prompt spread sits at +$4.68/bbl backwardation. This means that commercial refiners and physical buyers are actively paying a ~$5 premium per barrel to secure immediate delivery.
Along with this, we can see through the EIA Weekly Petroleum Status Report that commercial inventories are at cushing levels, that means that we continue hovering near critical operational tank bottoms. Furthermore, the US Strategic Petroleum Reserve (SPR) remains depleted near ~293M barrels ( a multi-decade low ). Back in 2022, the US used the strategic reserve to absorve geopolitical shocks at the time. They discharged over 180M barrels of emergency supply and at the time it worked (debatable). The problem today is that structural dampener is gone. Thus, until the prompt spread compresses below 3$, any flat-price drop in spot crude reflects paper deleveraging rather than physical oversupply. (Why $3? According to the chart, its a historical level - if there is a real reason for that value, I'm afraid I'm not aware of it so, if you know something more, please comment below!)
Speculative headroom
Via the CFTC COT report we can see that:
- managed money sits at ~94k contracts net long, having slowly ground upward from the summer base near ~60k contracts.
- non-commercial length hovers around ~130k contracts.
Here, historical context matters. In sustained commodity bull cycles, managed money net length routinely seems to peak between 350k - 450k contracts. Thus, the implied is that there is a lot of sidelined capital waiting for clearer signals to position itself.
https://www.tradingview.com/x/LxMjF6vT/
https://www.tradingview.com/x/yjKeCy1c/
US Dilemma: Debt Servicing
With US 10-year yields lingering near 5.0% and 10-year real yields elevated at ~2.58% ( $TVC:US10Y-FRED:T10YIE ) , the US Treasury faces steep debt-refinancing costs. These yields will tighten global dollar liquidity and raise the bar for speculative carry trades across risk assets (specially looking at JPY).
FED operations in foreign exchange and money markets have recently shown clear strain. This adds pressure to the US debt markets, driving yields higher and keeping the USD buoyant.
https://www.tradingview.com/x/OpeSysVU/
Midterms
Due to midterms, we oughta look at oil from a game theory perspective as well.
The White House wants to deflate gas prices (the one you pay at the pump). Facing immense midterm pressure, high retail gasoline prices represent an existential political vulnerability. Trump ratings are falling heavily therefore, for him, it's pure survival at this time. The Dems have came forth more than once stating that if they win, they'll both remove trump from power and pursue legal actions against him - possibly landing him in jail. So, the rational move for the administration is to manufacture headline "paper relief" events ahead of the midterms. Such as floating diplomatic breakthroughs with Iran or jawboning the Fed into doing its bidding.
Tehran, on the other hand, recognizes Washington’s political sensitivity to $100+ oil as we've been at this point multiple times this year. Their dominant play is to sustain asymmetric tension around maritime both chokepoints ensuring war-risk tanker insurance remains elevated.
FED Independence
The broader macro risk is the perceived loss of Federal Reserve autonomy as the US heads into midterms.
With US 10-year yields pressing near 5.0%, annual interest on federal debt is rapidly becoming the single largest non-discretionary fiscal burden. Treasury Secretary Scott Bessent’s expanded use of debt buybacks and bilateral FX maneuvers highlights growing official sensitivity to borrowing costs. Meanwhile, Chair Kevin Warsh faces the mandate of re-anchoring 2% inflation while front-month energy spikes. The executive branch is openly pushing for rate relief ahead of elections. The line for so long separated Treasury debt management from independent monetary policy is starting to erode.
If the Fed blinks and halts hikes or signals premature easing to cushion the political cycle while oil sits at current levels, the bond market will revolt.
I think that if this is the case, then inflation expectations and term premiums will expand aggressively.
The long end of the curve (10Y/30Y) will steepen sharply, tightening financial conditions regardless of what the Fed funds rate target displays.
And currency markets experience liquidity strain as foreign reserve managers (such as Japan) are forced to sell treasuries to defend their own currencies against the dollar, compounding US debt supply pressures.
It's not the end of the USD but it's clearly a realignment, a painful one.
So, after all that, what can we do? I see essentially three scenarios.
Important : Avoid the 100-106 range as it presents positive dealer gamma. (That's related to options, no need to bother much on why, but its part of the reason as to why large wicks show here and there.)
Idea 1
- Headline-driven diplomatic or regulatory rumors trigger selloff but prompt backwardation ( $NYMEX:CL1!-NYMEX:CL2! ) holds firm above 3$
- Execution Area: Re-entry long between 94 – 96 upon a 4H bullish reversal print
- Invalidation: Confirmed daily close below 88.50 (prior multi-month breakout)
- Take Profits: TP1: 112 || TP2: 120
Idea 2
- Real maritime disruptions stall talks (if they start), and cracks through 110 call wall (it'll trigger short-gamma dealer covering)
- Execution Area: Confirmed daily close above 108.50 with $NYMEX:CL1!-NYMEX:CL2! widening past 5$
- Invalidation: Daily close back below 103
- Take Profits: TP1: 112 || TP2: 120
Idea 3
- True de-escalation leads ahead of midterms forces price under 100, forcing dealers to flip ( aggressively sell futures into negative gamma)
- Execution Area: 4H close below 99.5 alongside $NYMEX:CL1!-NYMEX:CL2! compressing below 3$
- Invalidation: 4H reclaim above 102.5
- Take Profits: TP1: 95 (Put Wall) || TP2: 91.5
Note: you can see options walls in aggregators such as Barchart
I'll update the article in the upcoming days.
TITradingView Ideas56m ago
