Focus on Opec

Crude markets finished last week on a soft note with February 2009 WTI trading in a relatively tight $2 band before ending the day at just over $42.00. While weak consumer demand, directly related to the continuing global economic downturn, dominates the derivatives markets, traders and analysts will be closely watching physical crude leaving Opec ports over the next few months. The pressure is on the cartel to deliver on its promised cuts; any lack of adherence to its own mandates will result in a prolonged recovery period for energy futures.

Consumer hedgers can look to the recent drop in implied volatility to secure cheap upside protection for the upcoming calendar year. The Cal09 WTI $60/$80 call spread strip is trading around $3,500 per 1000 barrels per month or it can be purchased for Zero Cost by selling the $41 put in the same tenor. The Cal09 underlying swap strip is currently trading above $51.00.

Singapore, 11:00

Crude Markets Volatile after Opec Cut

Light-sweet crude oil prices drifted lower yet again yesterday, with February 2009 WTI currently offered just above $42. While Opec's supply cuts were answered by the market with a sharp move lower, it was the heavy sour crudes that may have reached at least a temporary bottom. It is the production of this type of crude that will be most affected by the cartel's recent severe production cuts. Lower quality Dubai crude actually rose slightly yesterday.

With the global economic slowdown expected to continue to weigh heavily on consumer demand for much of 2009, downside producer protection strategies remain the focus of many traders. Implied volatilities have also recently relaxed, allowing for relatively cheaper option premiums. Using Asian-style options, the 1H09 WTI $30 puts are currently trading around $1,100 per 1000 barrels per month. By selling the $70 call in the same tenor, the puts can be made Costless (the resulting position would be the 1H09 $30/$70 Costless Collar). With the 1H09 swap trading under $48, this hedge would not produce losses at expiration without front-month prices moving up more than $22.

Singapore, 08:30

Volatility Reigns Ahead of Opec Meeting

Energy markets yesterday experienced a continuation of the recent high volatility as front-month WTI crude oil broke through the psychological $50 level only to end the day lower ($6 range). Wednesday's upcoming Opec meeting has put a temporary floor under prices as traders await news on the producer group's latest cuts. The question of whether or not to announce further cuts has already been answered; what remains is just how much will be announced and then followed-through on in subsequent months. Adding pressure to Opec is the increasing floating storage among physical traders and oil companies. The strategy of buying cheap surplus oil and selling back-dated futures along the contango curve has allowed some to lock in returns for 2009.

Implied volatility continues to hold strong, resulting in sharp P/L's for those hedging with swaps and relatively inflated premiums for those using options. The most basic and safest strategies for locking in protection at year-end often involve vertical spread strips. An example of short-term producer protection would be the WTI 1H09 $30/40 put spread strip using Asian-style options, currently offered at $2,000 per 1000 barrels per month. The strip can be made zero-cost by selling the $65 call in the same tenor.

Singapore, 09:00

Energy Prices Drop on Auto Sector Bail-Out Failure

Crude oil prices backed off recent highs after the US Senate caught many traders off-guard by rejecting the proposed $14 billion bail-out plan. Opec's upcoming meeting as well as the expected production cuts of approximately 2-2.5M had been priced into the market when news of the auto bail-out failure broke. With global oil demand expected to continue falling through much of 2009, the pressure is on the cartel as well as non-Opec producers such as Russia to remove excess production from the market. Producer nations are facing the continuing pressure of a double revenue hit, from both falling demand and plummeting prices.

Short and medium-term vertical put spreads using WTI options allow for easy entry and exit (deep liquidity) as well as no counterparty risk (NYMEX clearing). The 1H09 $20/30 put spread is trading at only $700 per 1000 barrels per month. This producer hedge allows for total protection of $9,300 per month with only $700 at risk.

Singapore, 21:00

Opec Expectations Push Crude Higher & Implied Vols Lower

Energy prices surged yesterday as a series of bullish announcements, although none too surprising, served to cast doubt on recent 4-year lows in the crude oil market. The International Energy Agency contributed to traders expectations of a large production cut from Opec, by stating world oil demand would drop in 2008 and then again in 2009. Adding to the bullish pressure was the news that Russia would collaborate with Opec at the cartel's upcoming meeting in Algeria. Many traders are expecting the producer nation to contribute a cut of approximately 500,000 barrels per day on top of the 1.5 - 2.5M cut many expect to see from Opec.

The resurgent underlying WTI price served to decrease implied volatility, resulting in relatively cheaper option premiums. Producer bargain hunters looking to protect against further price drops in the first half of 2009 are looking at the 1H09 $30/45 put spread strip, currently trading around $3,300 per 1000 barrels per month using Asian-style options. This put spread strip can be purchased for zero premium by selling the $68 call in the same tenor. With the 1H09 underlying calendar strip trading around $54, this zero cost strategy contains no risk below $68 (a buffer of $14).

Singapore, 07:00

Calendar Strip Verticals Offer Cheap Protection

Expectations of continued demand destruction put an end to Monday's brief rally in crude prices. January 2009 WTI traded back down below $42 while the extreme contango seen lately along the future's curve relaxed somewhat. The one-year contango (Jan09-Jan10) has dropped to approximately -$13 while December 2012 and 2013 each fell more than $4.00 (compared to front-month crude only dropping about $1.50). This may be a reflection of physical buyers entering the market to hedge long-term storage. Also of note is a report from the World Bank predicting a prolonged global economic downturn which will depress commodity markets for the next several years.

As implied volatility persists at elevated levels, vertical spreads remain the cheapest protection available. Producers looking for protection against further downside moves can take advantage of the liquidity of WTI options (making trade entry and exit relatively easy) and look at calendar strip spreads such as the 1H09 $25/40 put spread strip, currently offered at $3,000 per 1000 barrels ($3,000 of total risk with $12,000 of downside protection per month). The put spread strip can be made costless by selling the $66 call in the same tenor.

Singapore, 08:00

Contango flattens in the back

Long term consumer hedgers have been drastically affected by the steep contango crude market. The prompt futures have been as much as $14 lower than same year December contracts. Call options appear dear looking forward at these levels. Today, however, we have seen a turn in the market with back months futures falling as much as $3 (December 13) versus Jan 2009. This may indicate that the carry market is fully valued with storage filling and long physical players starting to capture their buy and store strategy.

Consumers with long hedge strategies should have an opportunity to buy lower strike calls soon.

Please call or email if there is a particular level you are waiting for.

Bounce off $40 Highlights Upside Risks

Commodity and equity markets rallied yesterday on the back of a new stimulus announcement from China and fresh Obama infrastructure hopes in the U.S. Opec also ratcheted up the tough-talk with an announcement of a possible surprise cut in production of 2 million barrels at the cartel's upcoming meeting. Crude traders had called for a strong push lower to $40 in WTI and last week's move may have been it. With many analysts still looking for $30-35, the current level beckons consumer hedgers to lock in 4-year lows across the futures curve.

Using Asian-style options, the WTI 2Q09 $65/85 call spread strip is currently trading around $3,000 per 1000 barrels of exposure per month. With very limited risk, this consumer hedge has $51,000 of upside protection and can be combined with the sale of the $40 put in the same tenor to make the entire structure costless. With the 2Q09 swap currently trading around $52, the zero-cost strategy has about $12 of downside space.

Singapore, 08:00

Calendar Strategies Highlighted

Front-month WTI pushed below the key $45 level yesterday leaving traders to ponder the next level of resistance for the benchmark contract. Implied volatility increased as a result of the lack of any bounce yesterday. As uncertainty as to where the market will bottom-out continues to rise, option strategies become more popular, thus increasing the implied vol. Also of note is the contango spread between January 2009 and January 2010 which has now widened close to -$14.00 (Jan10 is trading about $14 over Jan09) which may be a direct result of the inability of physical traders, because of a lack of credit, to buy spot physical for storage and hedge by selling back-dated futures in the derivatives market. Similarly, many traders expect crude prices to rebound in late 2009- early 2010; this is also reflected in the wide time spread.

With no bottom in sight for near-dated crude futures, cheap put strategies continue to be a winning play. Using Asian-style options, the WTI 1H09 $30 put strip is still offered at a relatively cheap $1,300 per 1000 barrels. This strategy can be made costless by selling the $87 call strip in the same tenor. An excellent long-term view on the market would be to partner the above strategy with the purchase of the WTI 2H09 $90 call strip for about $2,000 per 1000 barrels. This strategy can also be made costless by selling the $38 put strip in the same tenor.

With the 2H09 calendar swap trading above $56, there is currently about $18 buffer room on the downside. Similarly, with the 1H09 calendar swap trading below $50, there is a buffer of more than $37 on the upside.

Singapore, 08:00

Crude Pushes Lower

WTI crude oil fell below $47 in volatile trading yesterday, marking a drop of more than $100 in less than five months. Short-term producer hedgers have benefited from cheap put purchases over this period, as rising inventories and refining capacity combine with relentless consumer demand declines and a global deleveraging of risk. Despite the steep drop of recent months, many traders see no reason for a near-term reversal of the trend.

Many hedgers have been taking advantage of short-term downside bargains combined with a longer-term bullish perspective. Using WTI Asian options, the Q109 $30 put strip can be owned for only about $1,000 of total risk per month per 1000 barrels. This position can be combined with the purchase of the 2H09 $90 call strip for about $1,500 of total risk per month per 1000 barrels. This "calendar strangle strip" position effectively captures downside risk in the near-term while providing potential upside consumer protection for the remainder of 2009.

Singapore, 09:00

WTI Below $50 as a Result of Opec's Failure to Cut

Front-month WTI crude pushed below $50 yesterday, giving back much of the gains from late last week. The drop in prices was seen by many as a reaction to Opec's lack of further production cuts at the sideline meeting in Cairo over the weekend. Approximately $5 of premium had been built-in to the market as a precaution by traders against a surprise cut by the cartel; it was this premium that began bleeding out during Asian trading and accelerated as the western markets opened.

Implied volatility increased yesterday as uncertainty returned to the market. Traders are now focused on how low crude can push in the next three to six months. Strong buying has been seen in both the $30 and $40 put range through the first half of 2009. Using Asian-style options, the WTI 1H09 $30 put strip is currently offered at a very cheap $0.70. That's $700 of total premium at risk per month- crude need not trade below $30 for these options to return protection/profits- any sharp drop towards the $40 level in the next few months should result in an increase in value for these puts.

Singapore, 08:00

Saudi Arabia Targets $75

Oil markets remained pensive on Friday ahead of Opec's sideline meeting in Cairo. As expected, the cartel did not announce further production cuts, however the markets may be stirred during Asian trading Monday morning as a result of Saudi Arabia's price targeting. In a rare step outside of typical form, Saudi Oil Minister Ali al-Naimi targetted $75 as a fair and reasonable price level. In late-day trading in NY, bargain hunters bid up the June 2009 $75 calls.

Similar consumer strategies have been targeted in WTI for mid to late 2009 when global crude demand may begin to return. Using Asian options, the July through December 2009 (2H09) $80/100 call spread strip is offered at about $2.70 ($2,700 of total premium at risk per month with a maximum payout of $17,300 per month). The call spread strip can be purchased for Zero Cost by selling the $48 put in the same tenor. With the 2H09 swap strip trading above $64.00, downside risk on this Zero-Cost 3-Way does not begin for more than $16.00.

Singapore, 16:00

Bounce off $50 Highlights Consumer Protection Strategies

Added stimulus to the ailing Chinese economy provided the backdrop for a rise in commodity prices as crude oil once again bounced off the $50 level. Current demand destruction was highlighted by the US stock data showing large inventory increases for both crude oil and unleaded gasoline. These numbers emphasize the plight of Opec; the cartel has struggled to cut production at a rate which would reduce stocks in competition with plummeting demand. The group continues to tread one step behind the market, although recent gains in equities combined with the crude market falling almost $100 in 4 months appear to have placed a temporary floor under the oil price.

Yesterday's rally from $50 resulted in lower implied volatility and therefore cheaper option premiums. Consumer hedges have come into the spotlight again with traders looking at the WTI Asian-style Q109 $65/75 call spread strip, currently trading around $1.90 ($1,900 of total risk against $8,100 of profit potential per month). For the same risk exposure but with a larger band of upside protection, traders have also been quoting the WTI Asian-style Q109 $70/90 call spread strip, currently trading around $1.90 ($1,900 of total risk against $18,100 of profit potential per month).

Singapore, 06:30

Renewed Push Lower for Crude Oil

Crude oil prices dropped sharply on Tuesday, reversing much of the gains enjoyed in the 2-day rally surrounding the weekend. The downward move pushed implied volatilities higher as producer hedgers moved to protect their downside. The 10% rally that began late last week enabled those traders that are long physical to buy downside puts (which become cheaper as the market moves higher). The lower implied volatility of the past few days only added to the incentive to lock-in cheap protection.

As the market has now retraced much of the recent gains, a renewed emphasis is on how low this market can push in the short-term. Bargains remain in near-term downside protection: using Asian options, the WTI January $40 puts are trading around $1.00 ($1,000 max exposure for 1000 barrels of protection). WTI crude need not trade below $40 for these puts to be profitable, any near-term movement lower may result in a sharp jump in the premium of this option. Traders can also opt for the January $30/45 put spread, currently trading around $1.10.

Singapore, 08:00

Citi Rescue Sparks Commodity Rally

Citigroup led the way yesterday as the beleaguered financial institution found itself backed by the US government- pulling both equities and commodities higher while the dollar lost strength on funding questions. January WTI pushed back towards $55 for its second consecutive rally as hedge funds shifted from a multi-year short position back to one of being long.

While the extend of the current rally may be debatable, consumer hedgers who have been taking advantage of cheap upside protection in the form of the February WTI $80 calls have enjoyed recent profits. While the $80 calls are now trading around $1,600 per 1000 barrels, the $70 call can be owned for even less premium by selling the Feb $90 call. This vertical call spread is currently offered at only $1,250 per 1000 barrels with a maximum payout of $18,750 should the rally in crude oil push the market back above $90.

Singapore, 07:30

Consumer Protection Strategies

Energy markets continued to push lower Friday as December RBOB unleaded gasoline traded below $1.00 for the first time in two years. January WTI crude oil settled under $50, marking a fall of almost $100 in only 4 months. While a protracted global recession will continue to hamper demand well into 2009, supply-side problems that originally pushed oil towards $150 have not disappeared. Thus, it is imperative for consumer hedgers to take advantage of the myriad of bargains in the highly liquid WTI options market.

Using Average Price Options (Asians), the WTI 2nd half of 2009 $85 call is currently trading around only $3.25. That's maximum exposure of only $3,250 per 1000 barrels/month to be long at $85 for every month from July 2009 through December 2009. Even cheaper, the $85/105 call spread strip in the same tenor has been trading around $1.50. With max exposure of $9,000, this trade has a potential payout of $111,000 should crude move back above $105 in the second half of 2009.

For Bunker Traders short physical and looking to buy the Singapore 180 or 380 swaps, cheap downside protection can be had by partnering the long swaps with the purchase of the American-style January 2009 $35 puts for only about $400 per 1000 barrels. Crude need not trade below $35 for the puts to provide protection against long swaps, any move lower in the next 2 weeks will result in an increase in value of the puts, partially offsetting any losses from the long swaps.

Singapore, 21:00

WTI Drops Below $50

Energy markets mirrored equities once again yesterday as WTI crude oil pushed below the $50 level. The front-month contract has now fallen almost $100 in only 4 months in the face of crashing world-wide demand, no short-term supply problems, still elevated stock and inventory levels, depleted investor positions and renewed shorting by hedge funds.

First quarter 2009 puts continue to attract attention from both producer hedgers and traders. Using Asian options, the WTI Q109 $30 puts are still trading at relatively cheap levels, only about $600 per 1000 barrels of crude. For more immediate downside protection, producers can look to the Q109 $35/45 put spread strip. Currently trading around only $2,500 per month per 1000 barrels, this hedge offers a total payout of $22,500 at or below $35.

Singapore, 09:00

Short-term Producer/Long-term Consumer Strategies Highlighted

Oil futures on NYMEX pulled back yet again yesterday as commodity markets continue to mimic those of equities. As traders wait for further proof of Opec cuts (and debate the likelihood of another cut before year-end), the lack of any positive news on the demand front as well as continued global economic turmoil continues to result in a dearth of bullish news.

Despite crude prices having dropped more than $90 in only 4 months, bearish producer strategies remain the focus for hedgers. Those who bought the WTI December 2008 $50 or $80 (even better) puts for next to nothing only a few short months ago have been rolling their profits and protection down to new and cheaper strikes. As highlighted yesterday, the Q109 $30 and $40 puts are trading at prices around only several hundred dollars to be short 1000 barrels from those strike levels.

Even more interesting, consumer hedgers are taking advantage of the prospect of a rebound in late 2009 by buying cheap upside protection in the form of calls and call spreads. The 2nd Half of 2009 $90 call strip has been trading around only $3.50, while the $90/110 call spread in the same tenor also has traded around only $1.50. That's $1,500 of total premium at risk per month to be long every $90/110 call spread in the second half of 2009. These values are reminiscent of the $50 and $80 puts only months ago when crude was trading around $100.

Singapore, 08:00

Slow Market Results in Cheaper Option Premiums

Oil markets refused to commit to a direction yesterday as front-month December WTI drifted around the $55 level. With no end in sight for the global economic turmoil, traders continue to focus on the lack of demand heading into 2009. While Opec recently lowered it's forecast yet again for year-on-year demand growth, it is becoming quite evident that demand may actually drop from 2008 to 2009.

The lack of movement in trading yesterday resulted in a sharp drop in implied volatility across the future's curve, resulting in cheaper option premiums. Using American-style options, the Q109 $30 puts are now offered around $0.60; that's $600 of total risk per month to be short from the $30 level in January through March 2009. While $30 may still seem far off, it's important to understand that the underlying futures do not need to trade below $30 for the buyer of this option to profit. Any sharp push lower in the next couple months would result in a spike in the price of the puts- allowing the hedger to sell them out at a profit.

Singapore, 08:30

Fundamental view - worth reading

DAVID PARKINSON

Globe and Mail Update

November 14, 2008 at 6:00 AM EST

Don't say Henry Groppe didn't tell you so.

Almost a year ago, when oil prices were humming along at close to $100 (U.S.) a barrel, the 82-year-old dean of oil analysts warned his clients that the price was destined for $60 before the end of the year. When it soared above $145 this summer, he stuck to his guns.

This week, oil fell below $60 a barrel.

It's that kind of prescience that gets guys labelled “guru” – a tag Mr. Groppe long ago earned in his almost six decades predicting the oil market. The soft-spoken Texan cemented his forecasting in the early 1980s, when he foresaw the collapse of oil prices from then-record levels of $40 a barrel.

“Essentially, all forecasting, no matter what's being forecast, is a straight-line extrapolation of what has been experienced very recently,” he said in an interview in Toronto yesterday.

“All of our work is aimed at forecasting changes of direction and discontinuity, because that is the reality of the world. For the last several decades, our forecasts are nearly always this contrast with the consensus.”

Despite his two big (and correct) calls of market downturns, Mr. Groppe is hardly an oil bear. In fact, he hasn't changed his tune much from when we last talked with him two years ago – a time when, ironically, many people felt he was being overly alarmist when he talked about prices being sustainable above $60.

His view is based on a fundamental belief that global oil production has peaked, and is destined to go into a slow but steady decline. At the same time, though, he also believes those higher prices will result in demand destruction as consumers shift to alternative fuels – thus keeping a lid on prices, albeit at higher levels.

“We're in a new era … in which oil production will be irreversibly declining,” he said. “The question then is, what price trend during that period will give you the matching demand destruction?”

“Our conclusion is that, on an average annual basis, [under] normal conditions, it's something that rises slowly from about $65-$70 to about $100. We think that will provide the necessary reduction in consumption.”

He said such a change in consumption is already happening, and not just because of a global economic slowdown. (The Organization for Economic Co-operation and Development yesterday slashed its 2008 and 2009 global demand estimates, citing declining estimates for world economic growth.) Power generators and major industrial consumers have already been switching away from oil and toward cheaper coal and natural gas, and many are in the process of retooling their equipment to lower consumption and shift to cheaper fuels.

While he's skeptical that worldwide vehicular consumption can be significantly reduced over the next 10 years through the use of alternative fuels, he believes fuel substitutions already happening among industrial users will be sufficient to offset the declining global oil production and keep average annual prices in that $70-$100 range.

“That's all been set in motion,” he said, noting that even China – which many forecasters point to as a major driver for continued long-term growth in oil demand – is changing its ways.

“In China, they're rapidly substituting – coal particularly.” Thanks to substitution, he said, “China can continue to grow vehicle population and gasoline/diesel consumption for many years without any increase in total oil consumption.”

Mr. Groppe blames the short-lived record surge in oil prices earlier this year on Saudi Arabia and the OECD's International Energy Agency. He said the Saudis, believing what proved to be an incorrect IEA forecast of a coming surge in non-OPEC oil production, cut its output in late 2006 and early 2007, a move that eventually led to a shortage of supply.

Now, he fears the Saudis may be making the same mistake again – cutting production amid forecasts of a recession-driven slump in demand.

He's forecasting that prices will rebound to average $83-$84 a barrel in 2009, as the current cheaper prices rejuvenate demand while the reduced Saudi production constrains supplies.

And what about oil stocks?

While some analysts point to the sharp decline in the forward strip in oil futures as evidence that oil stock price targets need to be slashed, Mr. Groppe thinks that's looking in the wrong direction.

“The strip has been the poorest forecaster of oil prices of anything that anybody has ever thought of using, yet that's what everybody has been using,” he said. As long as people are driving prices lower based on these forward-strip commodity price assumptions, “It presents the investment opportunity of a lifetime.”

Consumer Protection from Opec-Induced Spike

Energy markets pushed to lows not seen since January 2007 last week as the dollar continued its rally amidst the global financial turmoil. Producer hedgers who took advantage of cheap downside puts when crude oil was trading in the $90 range have now begun to roll their positions down to the $30 level. WTI February American-style $30 puts are currently offered as low as $700 per 1000 barrels.

Traders may once again take more notice of Opec, as the cartel has once again called an emergency meeting, this one scheduled for November 29th in Cairo. The group is expected to announce further cuts in production, possibly as much as 1.5-2m barrels per day on top of the 1.5m barrels already announced.

Consumer hedgers looking to protect against an Opec-inspired price spike should look to the WTI December Asian-style $65/85 call spread, currently offered at about $2,250 per 1000 barrels. That's $2,250 of maximum risk with a possible payout of $17,750. The buyer of the call spread would profit on a short-term price spike- thus providing cheap protection against a near-term bounce higher.

Singapore, 16:00

Vol implosion in products

Vols in the front months for products are down significantly. RB Dec down 15 vols to 69, HO dec vol down 8 vols to 57. Crude remains fairly well bid only down 1-2 vols in the front and about .5 in the back.

Volatility is so high that these moves are not that surprising. Directional plays are best served with spreads if the strategy is to hold through expiry. Those trading opportunistically with options have to be careful of swings.

Again, the crude market was largely affected by equity markets. We know demand is softer, and supply reductions are not yet significant enough to send us higher. However, back month crude has strengthened, indicating plenty of buyers for longer dated energy futures.

New York, 345pm.

HCE - hedge update (Crude Inventory)

Given the strong sell off, volatility remains extremely firm (81.5% in Jan WTI). With this in mind, long put spread strategies or 3-way strategies using a short call are attractive for inventory hedgers.

For those with long physical inventory, consider the 45-55 put spread in Dec WTI (Asian) which is currently valued at $2.60/bbl. This offers good leverage for low up front premium.

For those that can tolerate margin swings, consider the same put spread with a short 69 call for zero cost. This three way position captures the high volatility and offers some downside protection while creating a short position $9 higher than the current market.

Near-Term Bearish Momentum

Energy traders continued last week to focus on the global economic slowdown and its effect on consumer demand. Front-month WTI crude oil had declined by almost 10% on the week by the end of trading on Friday despite warnings from the International Energy Agency that long-term global trends in energy supply and consumption were unsustainable. The current (relatively) low crude prices have resulted in alternative energy supplies such as Canada's oil sands and finds off the coast of West Africa to be given lower priorities. State-run oil giants are also being forced to shoulder larger economic burdens, resulting in less re-investing in declining fields. The WTI future's curve serves as a striking reminder of where prices are expected to trade as the economic turmoil dies down. December 2008 is currently trading around $61.00 vs December 2010 trading close to $78.00.

Despite long-term calls for crude oil to push higher, the short-term picture remains fundamentally bearish. To capitalize on the downward momentum, traders and producer hedgers have been using Asian options to buy up cheap near-dated vertical spreads such as the December $50/60 put spread, trading around only $3,400 per 1000bbls. The put spread can be purchased for Zero Cost by selling the December $70 call. This trade puts no premium at risk at or below $70 in WTI crude oil and the December Asian options do not expire until the end of the 2008 calendar year.

Singapore, 23:00

Market unable to sustain rally

Whether we call it more of a range bound market or not, we have not been able to sustain a rally. The equity markets Wednesday were bearish following the news of President-elect Obama, and some negative earnings surprises. Energies did not respond well to apparently bullish inventory data, which tends to spell a potential for downside here overnight. However, we see a trading range forming with consumer hedgers increasingly locking in 2009 value when we reach the low 60s. That said, volatility remains remarkably strong overall. The best near term strategy is to roll crude spreads forward, avoiding too much long volatility. We continue to recommend long call spreads or long call 3-way strategies for consumers. Long inventory players would be better to opt for put spreads or longer dated (at least Jan) crude puts that are not subject to too much value erosion over the next week. Note that December American crude options expire on a Monday, which is bad for option owners.

New York 17h20

Cheap Protection Highlighted Against Volatile Markets

Traders yesterday turned their focus to announcements from Saudi Arabia, the world's largest oil producer, that the country would begin cutting production and exports to customers in the US and Europe. Opec is desperate to put a floor in the volatile and declining oil price, hence the large cut, to the tune of about 5%. However, the price jump is seen by many as an opportunity to lock in higher prices as the market continues to trend towards $50. The underlying trend lower is supported by weak demand fundamentals in the current economic turmoil.

The $7 rally in WTI crude yesterday highlights the need for hedging strategies with limited loss potential- the market is too volatile to simply enter the market by selling or buying swaps. Cheap option strategies are available which provide unlimited gains with only limited loss potential. Using Average Price Options, the December $55/70 put spread is currently trading around $5.00. That's $5,000 of maximum loss potential (yesterday's rally would have resulted in more than $7,000 of losses by selling swaps) with a potential payout of $10,000. For unlimited downside protection, producer hedgers can buy the December $60 put for only about $2.80. That's $2,800 of maximum loss potential against unlimited gains should crude oil continue lower in the current economic turmoil.

Singapore, 08:00

Cheap Protection Strategies

Energy markets dropped sharply again yesterday, all but erasing last week's gains. Front-month WTI crude oil sank below the $65 level while Singapore Fuel Oil 180 also gave back gains, losing almost $25 to trade below $280. Implied volatility remains firm in the paper market as hedgers have realized the benefits of buying cheap puts to protect against long swaps and even cheaper calendar call spreads to protect short physical postions.

Naphtha and gasoil prices continue to drop as well, prompting more and more hedgers to enter the market looking for inexpensive producer strategies. NYMEX will within a few weeks list Fuel Oil options contracts on their Clearport clearing system, but until that time, cheap, short-term strategies are available using highly liquid WTI options. Using Average Price Options (Asians), the WTI December 2008 $40/55 put spread is currently trading at only $2.00. That's $2,000 of total premium at risk with $13,000 of profit potential. Fuel Oil consumer hedgers looking for an entry point to buy the 180 or 380 Swaps may want to consider buying the above put spread to protect against downside losses.

Singapore, 08:00

Volatile October Comes to a Close

Trading in the volatile month of October came to a close on Friday as new evidence continues to emerge pointing to recessionary conditions in many western nations. The Bank of Japan followed the lead of central banks around the world with its own 20 basis point cut in the borrowing rate, reducing that country's overnight rate to only 0.3%. WTI crude oil continued to pull back from the $70 level as the continuing economic turmoil leads many traders to position themselves for further moves lower in what remains of calendar year 2008.

Producer hedgers continue to look for cheap downside strategies. Using Average Price Options (Asians), the WTI December 2008 $60 puts are trading around only $3.25. That's $3,250 of total premium at risk to be short from the $60 level for the next 60 days. This simple strategy allows unlimited downside protection without the margin calls and volatile daily swings of trading flat price. The long put can be made costless (meaning the hedger need only post margin) by selling the December $80 call. This trade puts zero premium at risk at or below $80.

Singapore, 12:47

Rally Proves Short-lived

WTI crude oil fell back yesterday in a much-expected retreat from the $70 level as producer cuts and consumer demand destruction rightfully returned to traders' focus. Medium-term market fundamentals point to slower growth in the global economy, reinforcing the recent bearish pressure on energy markets. The 2-day rally in both equity and commodity markets sparked by the highly anticipated US Fed's 0.5% rate cut was of course short-lived.

Implied volatility remains elevated but downside bargains still exist in the form of cheap put spreads and zero-cost 3-ways. Using Average Price Options (Asians), the WTI December 2008 $50/60 put spread is currently trading around $2.50. That's only $2,500 of maximum risk per 1000bbls of crude oil with a potential payout of $7,500. The potential payout can be raised to $10,000 by selling the December $82 call. This 3-way has zero premium at risk at or below $82 and would provide substantial downside protection if crude were to test the $60 level in the next few weeks.

Singapore, 08:50

CME/NYMEX Adds Gasoil, Fuel Oil & JetKero Options to its List of Cleared Products

*** CME/NYMEX will be launching Gasoil options (Asian, American & European style) on Clearport this weekend. Hudson Capital Energy will be making markets and providing liquidity and hedging strategies on these options 24hours/day with our offices in Singapore and NY shortly. Fuel Oil and JetKero options will also follow within a few weeks.

Commodity and equity markets reacted swiftly yesterday to the US Federal Reserve lowering interest rates half a point to 1%. However, the sharp move higher may soon prove fleeting as the move by the Fed is seen as largely symbolic and will have little to no effect on the global economic slowdown and the resulting drop in demand for raw materials. WTI crude oil pushed towards $70 before backing off to below $68.

Implied volatility softened in early trading yesterday, allowing downside producer hedgers several compelling reasons to re-enter the market. As the crude price rallies, long put strategies will of course become cheaper. Second, with implied volatility softening, option premiums will decrease even further. In early Asian trading this morning, the WTI December 2008 $65/45 put spread was offered at $4.25. The put spread was also quoted against the December $90 calls. This 3-way enables the downside or bearish hedger to purchase the $65/45 put spread and sell the $90 call while only putting $2.00 of premium at risk. That's a maximum loss of only $2,000 should crude oil stay below $90 and above $65 in December. Max gain on the trade would be $18,000 per contract.

Singapore, 08:30

Expected Fed rate cut and bullish stats

A solid rally in all energy products followed the Wednesday stats, which were slightly more bullish than expected. The market also is digesting the likelihood of OPEC taking more aggressive action in the near future. We know that we have cracked some higher cost producers threshold levels, which indicates some supply tightening in addition to OPEC. That said, some fresh data is pointing to lower demand which has led the market over the last few weeks. Volatility in crude oil has come in sharply with this rally, providing an opportunity to buy puts for those who remain bearish near-term. The Dec American $60 Put was offered $2.10/bbl, providing reasonable insurance for the next month. The costless crude collar was offered with the $60 put financed by the $76 call.

Consumers have been aggressively looking to hedge consumption for 2009 and also 2010. The call spread strategy remains attractive as volatility has yet to subside. The Fed rate cut was expected and the US equity markets appeared equally uncertain on the close.

New York, 5pm EST

Crude Rally Presents Producer Hedge Opportunities

Energy markets began yesterday by following equities higher but the rally proved to be short-lived as demand fears outweighed positive investor sentiment. The pessimistic near-term outlook of 6-12 months for crude demand reflects widespread fears of a worldwide economic recession, further compressing already weak demand. Yesterday's move higher resulted in implied volatility staying at already inflated levels.

December WTI crude managed to push back above $65 in early Asian trading, presenting many bargain opportunities for downside hedgers. Using Average Price Options, the December 2008 $40/60 put spread is currently trading around $3.75. That's $3,750 of total premium at risk to short crude oil from $65. Any move lower in the next few days would produce quick profits for this protection strategy, while holding it until expiration at the end of December could see a maximum profit of $16,250 with only $3,750 at risk. The strategy can be combined with the sale of the December $78 call to make the entire structure Zero Cost.

Singapore, 08:30

Traders Focus on Lack of Demand

WTI December crude pushed closer to $60 yesterday as traders choose to ignore Opec's production cuts and focus instead on the continuing drop-off in demand. As winter quickly approaches, many refineries continue to scale-back production. The drop in crude prices as well as the sharp and sustained increase in implied volatility is mirrored closely by global equity markets, particularly the S&P500 which has shown a high correlation as of late with the price of crude oil. In the U.S., the ViX (volatility index) has seen a similar sharp and sustained increase in volatility.

Despite the seemingly bottomless pit energy markets appear to have fallen into, consumer hedgers have been entering the market lately to lock in lows not seen in almost a full year. In the Singapore Fuel Oil 180CST market, December 2008 is currently trading around $310. This represents lows not seen since early 2007. However, with the continued volatilty the market has witnessed, just buying swaps means taking on an enormous amount of downside risk on a daily basis. Combining the FO swaps buy with the purchase of the WTI Average Price November $55 puts for only about $1.50 would put a floor in the hedgers losses while still allowing for unlimited profits on the upside.

FYI: Last week's recommendation to buy the November $65 puts as downside protection against any Fuel Oil swaps purchase would have saved the hedger more than $125,000 on a 1:1 basis.

Singapore, 08:30

All Eyes on Opec

Oil markets traded within a relatively tight band yesterday as all eyes are on Opec's emergency meeting today. Traders and analysts are almost unanimously predicting the cartel will announce a further production cut; most estimate between 1-1.5m barrels per day while many expect the cut to be closer to the 2m barrel level. Opec has a second meeting planned for December where further cuts can be made, once the market has had time to absorb any cuts announced today. Regardless of the announcement, volatility will certainly continue in the near-term, thus option protection strategies are the most sensible.

Traders and hedgers have been entering the market within the past week to buy downside protection in the form of cheap puts. While the value of these options has increased substantially, cheap protection strategies still abound. The November through December $65/50 put spread strip is currently trading around $3.00 using Average Price Options. That's $3,000 of maximum loss potential for $12,000 of protection per month below $65. This strategy helps the hedger avoid paying a large premium for downside protection while still locking in protection to the $50 level.

Singapore, 08:15

Augmenting Fuel Oil Swaps with Highly Liquid WTI Options

Energy and equity markets dropped sharply yesterday as traders' focus remains on current and looming recessions in the western world. The crude oil market appears to have little faith in Opec's ability to put a floor in prices, as December WTI dropped below $70 to trade in the $66 range. Expectations for production cuts from Opec range from a minimum of 1m barrels to as high as 2.5m barrels, possibly spaced out over a period of 3-4 months.

A Fuel Oil hedger buying 5 lots of the 180 Swap around $370 early yesterday would have booked losses of approximately $185,000 according to settlement. Our recommendation was to augment the hedge by purchasing the November WTI $65 puts for $2.00. These puts are currently trading around $3.50, resulting in a gain of about $50,000 if the hedge was entered into on a 1:1 ratio. Thus, instead of exiting the market today with losses of $185,000, the prudent hedger would have saved himself $50,000.

Singapore, 09:45

Volatility Returns over Opec Questions

Volatility in oil markets returned yesterday after a short hiatus as crude prices drifted higher in early Asian trading, only to retreat sharply during NY hours. Traders had been banking on $70 (WTI) providing short-term support and as a result implied volatility began to retreat. However, doubts over Opec's ability to coordinate and follow through on what will surely be an announcement of cuts later this week, has caused traders to sell the market off and test the $70 level yet again. Opec's recently announced production cuts have yet to be greatly felt by the physical market and many analysts are concerned over the cartel's lackluster record in following through on its often bold announcements. Non-Opec producers Norway and Russia have declined to consider production cuts.

Hedgers can certainly expect the resurgent market volatility to affect their long-term outlook. Consumers looking to lock in prices at relative bargain levels need to be aware of downside risks should the physical market continue to push lower. Buying Singapore 180cst Fuel Oil Swaps around the $370 level should be paired with the purchase of highly liquid WTI puts. Using Average Price Options, the November 2008 $65 puts can be owned for only about $2.00 per contract. That's $2,000 of maximum exposure per 1000 bbls. If the Fuel Oil swap trends lower in the short-term, the consumer hedger can sell out the losing position which may be to a large extent compensated for by the profits on the long WTI puts. Hudson Capital Energy makes markets and acts as counterparty for both the Fuel Oil Swap and WTI puts without charging any fees. This is an optimal strategy to consider in these extremely volatile markets.

Singapore, 09:45

Basis Risk Strategies for Volatile & Illiquid Markets

Energy and metal prices failed to rebound in Friday trading as the current market volatility shows no signs of abating. Equities also failed to recover lost ground with the Dow sinking back below the 9000 level. Traders are watching Opec nervously as the oil group has called an emergency meeting for November ahead of its regularly scheduled December gathering. Late last week the cartel moved up the hastily assembled meeting to next Friday. As recently as early October with WTI crude oil trading closer to $90, some of the more hawkish members of the group issued statements claiming the world was oversupplied by between 0.4 - 0.5m barrels per day. As the market momentatily broke below $70, those extra barrels of supply were revised upwards by the group to 1m.

As traders view an Opec production cut as a fairly solid bet, it is pertinent for consumer hedgers to enter the market to take advantage of the more than 50% drop in many energy markets since only mid-July. Singapore bunker traders can protect against an Opec-inspired jump in prices while also limiting downside exposure by purchasing the Singapore 180CST Fuel Oil Swap in December at about $360. In order to avoid unlimited downside losses, the prudent hedger would purchase WTI puts (WTI options are the most liquid energy options in the commodity trading world, and help avoid the twin traps of counterparty credit risk and limited counterparties that Fuel Oil options currently entertain. These twin risks result in large bid/offer spreads making it extremely difficult to profitably exit bilateral Fuel Oil option deals). Using Average Price Options, the WTI December $65 puts are currently trading around $3.75 per contract. That's maximum risk of only $3,750 per 1000bbls of crude oil which provides unlimited downside protection should both Fuel Oil and Crude Oil continue lower. The above combination strategy represents unlimited upside protection gained from Fuel Oil swaps, with cheap unlimited downside protection from Crude Oil puts.

Singapore, 18:30

Sharp Drop Draws Out Bargain Hunters

Recessionary fears pushed crude oil below $70 in NY trading yesterday as market volatility again pushed to new heights. Energies rebounded in early Asian trading as consumer hedgers and investors looked to gain from the drop of more than 50% in crude prices since only mid-July. Not just commodities, but shipping costs as well have experienced large and rapid price falls, with the Baltic Dry Index trading at its lowest level since November 2002.

The early morning rally in crude prices has opened up fresh producer hedging opportunities. Using Average Price Options, the WTI December 2008 $55/70 put spread is currently trading at only about $4.50. That's $4,500 of total premium at risk with 43 days to profit from further downside moves in crude oil. The hedge can be owned for Zero Premium by selling the $82.50 call in December. This trade provides a full $15,000 of downside profit potential with zero premium at risk at or below the $82.50 level.

Singapore Fuel Oil hedgers looking to protect their downside can combine the above strategy with the sale of the 180 Fuel Oil Swaps in the WTI/Fuel Oil crack, currently trading around $19.50.

Singapore, 10:30

Drop in Energy Prices Results in Consumer Buying Opportunities

Equity and commodity markets fell sharply yesterday, quickly erasing Monday's gains, as traders focus on the near-term economic fallout of the current banking crisis. Opec, meanwhile, spoke out yet again on the impact on demand from the economic turmoil. It is a near certainty at this point that the cartel will cut production at its emergency meeting on November 18th. This usually bullish announcement had no impact on the market, as front-month November WTI crude has pushed below $73.50 in early Asian trading.

Despite the increase in implied volatility, consumer protection strategies have become increasingly cheaper as the market moves lower. It is now possible to lock-in crude prices below $100 for the entirety of the coming year by purchasing the Cal09 $90 calls for only $7.25. Also, the Cal09 $100 calls can be owned for Zero Cost by selling the $65 puts in the same tenor. This strategy puts no premium at risk at or above $65 and provides unlimited upside protection above $100.

Singapore, 09:30

Cheaper Premiums Allow Hedgers to Enter New Protection at Discounted Levels

Yesterday saw a sharp turnaround in energy markets as traders begin to focus on the possible after-effects of the current banking/liquidity crisis. The trickle-down effect to the main-stream economy is expected by many analysts to cause several quarters of recession in the United States which may spread eastward. Early Asian trade had markets sharply higher, and several producer hedgers entered the market to purchase cheap downside protection in the form of put spreads. These mid-day Asian-hours hedges paid off swiftly as the market sold off sharply during late-day trade in NY.

Implied volatility softened early yesterday, thus allowing consumer and producer hedgers to enter the market today to lock in significantly lower premiums. As the bearish pressure looks to be unrelenting in the short-term, calendar hedges such as the Q408 through 1H09 $60/75 put spread strip are being purchased to protect against a further drop in prices. This strip is currently trading around $4.00, thus providing $11,000 of downside protection per month after the $4,000 average cost is factored in. To gain the full $15,000 per month of protection, bearish hedgers can make the trade zero-cost by selling the $96 call in the same tenor. This hedge offers no premium at risk below the $96 level.

Singapore, 07:40

Commodities Retrace on Bullish Government Announcements

Commodity and equity markets rose sharply yesterday as the governments of leading industrialized nations pledged to support the struggling global financial system. Metals and energies in particular rose firmly, with November WTI crude oil pushing back above the $80 level to its current level above $83.00. Helping the recent bullish turn is the unequivocal statement by several of the more hawkish members of Opec (Iran, Venezuela and Algeria) to request for a cut in production at the cartel's emergency meeting next month in Vienna. Several Opec members have argued that the world is currently oversupplied by as much as 0.5m barrels per day.

Yesterday's sharp move higher served to increase implied volatility during Asian trading. While the move was quite convincing from the bullish perspective, doubts remain over the economic stability of large consumer nations. Focus is now on the extent to which the recent financial turmoil has damaged commodity demand for the near-term. Thus, the rally may be short-lived and downside producer hedges remain in the spotlight. Using Average Price Options, the November through December WTI $80/60 put spread strip is trading around $4.25. That's max exposure of $4,250 per month with a total payout of $31,500 should both months settle below $60. The trade can be made costless by selling the $90 call in the same tenor. This hedge would provide $40,000 of downside protection with no premium at risk below $90.

Singapore Fuel Oil hedgers looking to protect their downside can combine the above strategy with the sale of the 180 Fuel Oil Swaps in the WTI/Fuel Oil crack, currently trading around $19.00.

Singapore, 08:30

Financial markets recover - a sigh of relief

In a quasi-holiday (Columbus Day), crude oil markets followed the equities market higher, with volatility easing in tandem. Crude volatility eased much less than other financial markets and a follow-on Tuesday would indicate even lower levels.

For those using 3-way strategies (selling net options), there may still be time to capture good premium. Inventory hedge strategies for November include the 65-75 put spread versus the 96 call for zero cost. A move down due to bearish stats Wed would benefit from the decrease in prices and potential for further volatility easing.

We expect the US Treasury to firmly step in and buy US bank equities. This will prompt a follow-on rally in the DJIA after a huge 10% plus up day Monday.

Energy Markets Not Immune to Global Asset Selloff

Energy and commodity markets rounded out last week with a complete collapse in Asian trading on Friday. The dramatic price fall, which continued into NY trading, was punctuated by continued selling by investors across all asset classes throughout the entirety of the world economy. The International Energy Agency added to the bearish pressure by lowering expected oil consumption in 2008 to 86.5m barrels per day while also decreasing 2009's expected demand by almost 0.5m barrels. The weak demand seen throughout the summer driving season, which was largely a result of the dramatic price rise, is now expected to continue through the remainder of the year as the banking crisis pours into the world's local economies.

Despite the rapid drop in crude oil prices, producer strategies using put spreads continue to be popular, as they offer cheap protection which has proved itself valuable in recent weeks. Using Average Price Options, the WTI December 2008 $75/60 put spread is currently trading around $4.50. That's $4,500 of max potential premium at risk with a payout of $10,500 should crude oil prices continue lower. The price of the put spread can be cut in half by selling the December $105 call at $2.25. This strategy provides the downside hedger with a $12,750 payout should December WTI settle below $60, while putting only $2,250 of premium at risk at or below the $105 price level.

Singapore, 19:50

Consumers Buying Cheap Upside Protection

Energy markets along with equities plumbed new lows yesterday as the financial turmoil continued. Front-month November WTI is now trading below the $85 level, marking a drop of more than $62 since only mid July of this year. In a swift reaction, Opec has dropped its prevarications and announced an emergency meeting on November 18th in Vienna where many traders feel the cartel will announce further cuts to production. The initail 500,000 barrels per day cut of only several months ago has yet to be fully realized by Saudi Arabia, the defacto group leader and only member capable of quickly increasing or decreasing production. Oil demand in the US was reported as down 8.6% last week against the same week in 2007 by the US Department of Energy.

Implied volatility in WTI Crude Oil softened somewhat yesterday, decreasing substantially the premiums demanded for upside call options. Consumers looking to protect against a return to higher prices in the first half of 2009 can buy cheap protection in the form of the 1H09 (First Half 2009) $110 call for only about $4.75. By buying this Average Price Option, the consumer has unlimited upside protection above $110 with a maximum risk of only $4,750 per month. This upside strategy can be made costless by selling the $73.50 put in the same tenor. In this instance, the hedger would only need to post margin and would have Zero premium at risk at or about $73.50.

Singapore Fuel Oil hedgers looking to protect their upside can combine the above strategy with the purchase of the 180 Fuel Oil Swaps in the WTI/Fuel Oil crack, currently trading around $15.50.

Singapore, 08:00

Petroleum resistant to market selloff

Crude markets were largely unchanged all day until the stock market (Dow) fell dramatically near the close. Volatility in stocks is now higher than crude oil at 65%. Lower heating oil prices have created an excellent opportunity for diesel and jet hedgers to protect their consumption for the balance of the year and 2009. Natural gas remains resilient to the downdraft across markets.

Opec Statements, US Inventory Data result in Opaque Outlook

Crude oil briefly traded into positive territory yesterday shortly after coordinated world-wide interest rate cuts were announced. However, the slashing of borrowing rates was not enough to sustain the market as further demand destruction data as well as bearish US inventory numbers caused traders to push the market lower once again. Petrol demand continues to weaken in the western world while US crude stocks showed a remarkable build last week of 8.1m barrels on the back of increasing imports as well as weak refinery demand. Traders are also keeping an eye on Opec, which appears to be flirting with the idea of an emergency meeting in November to drop output for the second time in only 3 months. Several members of the cartel, including Iran, have pointed to data indicating the world is oversupplied by as much as 400,000 barrels per day.

Bearish and potentially bullish news continue to keep implied volatility levels inflated in crude oil options trading. The VIX (volatility index) also is trading at inflated levels- traders watch the vol levels of both markets in tandem, as they often support each other. Regardless, the high premium levels are expected to continue, thus resulting in traders moving to profit from downside moves by buying cheap put spreads such as the November 2008 through March 2009 $85/70 put spread strip. With a maximum loss potential of only $5,300 per month, this trade provides a total of $48,500 of downside protection through the first quarter of 2009.

Singapore, 08:30

Crude and gasoline builds

Statistics revealed gasoline demand destruction and significant crude inventory builds. However, crude did not decline as much as expected. Consumer hedgers for diesel and jet fuel are starting to buy upside insurance now for 2009, which has given support to heating oil markets. Gasoline demand has forced the RB cracks to the negative territory, creating opportunities to buy cracks for 2009 at very depressed levels.

With volatility remaining at very high levels, using spreads (collars) or 3-way structures is very attractive. A November through December 95-105 call spread (Asian) is zero cost selling a 77 put. This hedge would be good for those that are holding low or no inventory against short sales for Nov and Dec.

Implied Volatility Softens; Vertical Strategies Remain Paramount

WTI crude oil bounced back up towards the $90 level yesterday on thin trading as the dollar pared gains and equities softened further. The continued shutdown of almost half the production of crude and natural gas in the Gulf of Mexico may be back in the focus of trader's attention. Interestingly enough, preceeding Hurricanes Gustav and Ike the Gulf region was able to produce 1.3m barrels per day; prior to Hurricane Katrina in 2005 the production level was 1.6m. This begs the question of can the region even return to the depleted levels of the post-2005 hurricane season? On a similar note, Pemex (Mexico's state-run oil producer) announced evacuations from several offshore Gulf platforms as tropical storm Marco bears down. This latest bullish data needs to be absorbed along with continued demand destruction figures. US oil consumption remains close to 10-year lows and products demand continues to decline at a rate of approximately 6% per month based on the previous year.

Despite a softening in implied volatility yesterday, option premiums remain inflated. The best (and cheapest) protection in current market conditions continues to be found in verticals and combination strategies. After yesterday's bounce, producer hedges should be considered this morning. Using Average Price Options, the Q408 through Q109 $85/75 put spread provides $10 of downside protection per month for only about $3.50 of total premium at risk. The put spread can be made cheaper by selling the $110/125 call spread in the same tenor at $1.00. Using this combination strategy, the hedger has $45,000 of total downside protection for the next 6 months while paying only $15,000 in total premium. The hedger also has upside risk from $110-125.

Singapore 08:50

Crude volatility remains high, heat/diesel hedgers active

Monday's late day floor trading action bid up crude volatility over 70%. This level subsided today to the mid 60s% for November American options which expire next week. The markets remain torn between fundamental directional hedges and the pure play asset sell-off experienced across global markets. Though led by the financial sector, the lack of liquidity in equity and bond markets have created a down draft seeking the next bid. We have not seen a sell-off in crude as one might expect. Major players may be sitting on the sidelines if not forced to liquidate. Although demand destruction in refined products (especially gasoline) is now well documented, the low inventory positions and refinery turnaround schedule should compensate. Negative RB cracks form November and December have reached $-2.15 per bbl. Heating oil remains firm with winter cracks above $21/bbl. Consumer hedgers have been active buying the heating oil upside calls.

Options Present Safer Hedging Opportunity than Swaps or Futures

Crude oil led the way lower yesterday during a broad-based sell-off across both commodities and equities. Hedge funds have become increasingly bearish on oil products, helping to push unleaded gasoline and heating oil futures to lows not seen in over a year. While the futures market continues to search for that level which restrains demand growth but does not destroy it, the macroeconomic disaster befalling much of the western world continues to pull financial flows away from the energy complex.

Implied volatility pushed to fresh one-year highs yesterday in front-month WTI crude. Again, vertical spreads remain the best answer to the current market turmoil; simply buying or selling swaps exposes the hedger/trader to swings of more than $5 per day. A simple consumer vertical such as the Q4 $95/105 call spread strip provides $10 per month of upside protection with a max loss potential of only $1,700. Buying a swap at this point to protect against an upside move can quickly result in unlimited losses and daunting intraday volatility.

Simply using Fuel Oil options does not appropriately address the risk issue. It's important to understand that the Fuel Oil options market is extremely illiquid as there are very few market-makers. These traders are forced to take into account both counter-party credit risk as well as basis risk (often backing out of the trade with more liquid crude oil options). Hedgers would often prefer to use the product which most closely matches their physical exposure, hence bunker traders may hedge with Fuel Oil options. Even though the hedger doesn't believe he/she is taking basis risk into account, the market-maker they are trading with often is, as well as a lack of liquidity and counterparty credit risk. Trading on an exchange-cleared market allows a hedger to take advantage of liquid markets and manage the basis risk on their own, instead of giving it up on a wide bid/offer spread to a bank.

Singapore Fuel Oil hedgers looking to protect their upside can combine the above strategy with the purchase of 180 Fuel Oil Swaps in the WTI/Fuel Oil crack, currently trading around $16.00.

Singapore, 08:51

Hedgers Look to Verticals for Cheap Long-Term Protection

Energy markets joined equity and bond markets last week in some of the most volatile trading seen in years. There is no end in sight as financial institutions across the western world refuse to lend to each other; investor panic has also intensified as investors pull money out of commodity and equity indexes. Realization has begun to dawn that the $700B US bailout will not halt the slowing of global manufacturing and production, resulting in sharp drops in commodity prices across the board. Front month WTI crude oil ended last week below $95 as bearish pressure continues to be exerted on the market.

Despite the volatile trading and increased margin requirements, very cheap protection is available for those with both upside or downside exposure in the form of verticals (call spreads and put spreads). Protection between $85 and $65 for the next 6 calendar months can be purchased for only about $3,800 of total risk per month. That's $97,200 of total downside protection for the entirety of Q4 2008 and Q1 2009. The premium paid for the put spread can easily be cut in half by selling the $100/110 call spread in the same tenor. The hedge would then provide a total of $108,600 of downside protection for only $1900 per month of premium. The hedger would also have $10,000 of upside risk per month between $100 and $110.

Singapore, 21:30

Consumer hedgers coming back

US demand figures from Wednesday took centre-stage in trading yesterday as energy markets sold off across the board. Product demand is showing a 7.1% decrease in September from the same period a year ago. Traders are watching the outcome of the US House of Representatives vote on the bail-out package. Unfortunately, while a "no" vote may result in a financial meltdown, a "yes" vote may cause nothing more than increased volatility across all markets.

Option volatility returned in front-month crude oil yesterday, although consumer hedgers have stepped back into the market to buy cheap upside protection in the form of call spreads. The WTI Q4 $100/115 call spread strip can now be owned for an average price of only $2.20 per month. That's $2.20 of total exposure in a market that is moving more than $5 per day in any given direction. The $2,200 of risk buys the consumer hedger $12,800 of protection per month, or $38,400 of total Q4 protection.

Singapore 10/2/2008 0759

Volatility subsides awaiting next data point

Crude options volatility subsided after spiking into the high 60s%, which indicates a fear factor equivalent to stock volatility index 40+%, only equal to major market events such as 9/11 or serious crashes. Crude players globally are scratching their heads to come up with a strategy short term to hedge cargoes and inventory. The Q4 110 Asian crude call could be had for $3/bbl, which seems to be a reasonable premium given what has been happening. The zero cost hedge for that period would be the 89/110 (Collar).

The inventory stats posted today showed unusually bearish numbers in RBOB. We feel they underestimate RB inventory and likely will bounce.

With the potential for $10 moves in crude oil, options are still the best tool. Selling volatility as part of an overall strategy (part of a 3 way) may not be bad as volatility is likely to subside.

The US Senate is set to vote this evening (730 pm EST) on the new package. The US House of Representatives will vote on the proposal Friday. Meanwhile, credit markets remain in limbo.

NY - 1/10 502pm EST

Market Volatility Continues to Surge

Volatility increased across all markets yesterday as the US House of Representatives rejected the proposed $700 billion bail-out package. Gold traded well over the $900 mark as traders sought a safe haven from the increasingly negative outlook from all other major markets. The CFTC released data showing the number of net longs in November WTI crude increased throughout September as the market rallied back towards the $110 level. With yesterday's selloff, expect the pressure to increase on these longs to all head for the door at the same time, possibly forcing the market down further.

Cheap option strategies are the most sensible choice for this turbulent market. Hedgers looking to protect against further downside moves in the next 6 months can find inexpensive protection in the Q408 - Q109 $90/80 put spread for only about $3.20. With the market gyrating more than $5 per day in either direction, a hedge with max exposure of only $3,200 per month begins to look very shrewd.

Singapore Fuel Oil hedgers looking to protect their downside can combine the above strategy with the sale of 180 Fuel Oil Swaps in the WTI/Fuel Oil crack, currently trading around $12.00.

Singapore, 09:18

Producer Hedges for a Volatile Market

Crude oil consolidated above $105 in late-day trading Friday as commodity markets remain buoyed by fear of a failure to pass the US Treasury's bail-out plan. As several weeks of extremely volatile trading looks set to continue, option premiums remain at increased levels. Recently, both consumer and producer hedgers have looked to the option markets as a way of protecting their fuel inventories or future purchases as the swaps markets have become too dangerous to navigate. Spreads can be purchased on the cheap to provide both upside and downside protection with very little or no premium at risk.

An example of such a producer hedge strategy can be found using Asian options in WTI crude oil. The Q4 $100/85 put spread strip can be owned for only about $3.10. That represents $3,100 of total premium at risk per month with $11,900 per month of downside protection. Again, if the market reverses and moves higher, the max loss on the hedge is only $3,100 per month. The protection can be made costless by selling the Q4 $118 call. This zero premium strategy provides about $12 of room on the upside before the short call becomes active.

Singapore, 23:17

Late rally but more questions than answers

Washington Mutual being the latest financial to call it quits, we now move into the weekend with more questions than answers. While there has not been much of a range today, volatility remains firm. Asian markets will have a jump on markets on Sunday evening and will be able to trade on data coming out over the weekend.

The downside risk here is that crude sells of with financial markets. The outcome of Morgan Stanley still remains to be seen. Credit default swaps were trading higher as of Friday evening for MS debt.

Hedgers protecting inventory may want to consider the WTI 90-105 put spread here for $3.90 per bbl. If the market drives back down to $90, this trade will prove to be very beneficial. Please contact HCEnergy Asia for up to date strategies Monday AM Asia time. Likely there will be some short term strategies that will pay off quickly. HCEnergy will provide liquidity to customers as of 0900am Singapore time.

NYC, 16h00 Fri.

Hedgers Turn to Spreads as Volatility Increases

Crude oil prices fell yesterday as traders digested solid confirmation of the widespread damage inflicted by the recent Gulf of Mexico Hurricanes. The data points to short-term losses in refinery output and production, while market players have taken a larger look at demand destruction on a consumer level. Of particular interest was the refinery utilization number, dropping to 66.7% which is below the 69.8% level hit in the aftermath of Hurricanes Katrina and Rita. As a result, US gasoline stocks suffered predictable losses, falling 5.9m barrels to their lowest level in more than 18 years. At the same time, US retail gasoline demand, as reported by Mastercard Advsors, fell by more than 5% in the week ending September 1st.

Market volatility continues to raise caution for hedgers and traders. Moves of between $5-$10 can occur in any given trading session, thus entering the market with swaps and futures can be extremely dangerous. While option premiums have become increasingly inflated in the recent volatility, call and put spreads remain an inexpensive strategy to cover risk. Using Asian options, the WTI Q4 $95/80 producer put spread strip provides $15 of downside protection and is currently trading around $2.40. For $2,400 of total risk per month, the hedger gains $37,800 of Q4 protection.

Singapore, 09:00

Pullback Provides Consumer Hedgers with Reprieve

Energy markets pulled back yesterday following an almost uninterrupted run from $90 back up to $110. While trading based on fundamentals instead of panic has yet to return to any market, crude oil traders appear to be digesting the latest supply issues, such as Mend's "war on oil" in Nigeria, Saudi Arabia's actual trimming of production and a return to importer status for China, that is after a brief stint of exporting oil products following the Olympics. The full extend of damage done to Gulf of Mexico's production facilities has yet to be quantified, however it looks to be several months before the region will return to pre-hurricane levels.

The recent pullback provides consumer hedgers with a reprieve for locking in protection against higher prices for the remainder of 2008. Using Asian options, the WTI Q4 $115/130 call spread can be owned for an average price of only $2.30 per month. That's only $2,300 of total exposure per month with a maxium payout of $38,100. The call spread can be owned for Zero Cost by selling the $92 put in the same tenor. This would make the max payout on the call spread strip $45,000.

Singapore Fuel Oil hedgers looking to protect their upside can combine the above strategy with the purchase of 180 Fuel Oil Swaps in the WTI/Fuel Oil crack, currently trading around $18.00.

Singapore, 10:00

Market Volatility Continues Unabated

Expiring front-month October WTI crude oil traded more than $25 higher yesterday as shorts were forced to square-up positions on the last trading day of the month. A weakening dollar exacerbated the shift into commodities as investors begin to question whether the government's $700B bailout will continue to see delays resulting from partisan red tape. Even if the rescue plan is implemented quickly, the Federal Reserve will be forced to handle long-term inflation risks directly resulting from the bailout.

Non-Opec producer Mexico continues to disappoint, reporting reduced oil exports for August. Meanwhile, defacto Opec leader Saudi Arabia has in fact begun to cut back on production. This at the same time China reports an 11.5% increase in oil imports over August of last year. The supply-side problems have clearly not gone away and it looks like world-wide energy demand persists throughout the financial crisis.

Singapore, 08:00

Supply-Side Issues Push Market Higher

Crude oil prices pushed back above the $100 level yesterday amid mounting supply-side disruptions. Mend, the Nigerian militant group, has been launching fresh attacks almost daily on the country's production facilities. Currently, losses are estimated to be approaching 1m barrels per day as about 300,000 b/d were taken offline just this week. In the Gulf of Mexico, fallout from Hurricanes Gustav and Ike has yet to be quantified, however gasoline stocks now sit at 40 year lows. A full damage assessment of post-hurricane production capacity will take weeks, thus fostering further volatility in the crack markets, specifically gasoline and crude oil.

There still remains time for consumers to lock in crude prices at six-month lows. Using Asian options, the WTI Q4 $105/120 call spread strip can be owned for an average price of only about $3.70 per month. That's $3,700 of total risk per month with a maximum payout of $33,900 should oil prices rally back above $120. The trade can be made costless by selling the $95.50 put in the same tenor. In this case, the hedge would have a maximum payout of $45,000.

Singapore 15:30

Volatile Trading in Energy Markets

Energy markets traded through another volatile session yesterday as traders alternated focus between a financial meltdown (likely resulting in further demand destruction), a weakening dollar (inflation flows causing oil prices to rally), and lastly, crude inventory data showing stalled production in the Gulf of Mexico. Volatility exploded yesterday as market players attempted to either pare short option positions, or increase longs, resulting in further increases in premium.

As it is, option strategies remain the safest play in the current environment, allowing the prudent hedger or trader limited downside paired with unlimited profit potential. Consumer hedgers looking for short-term upside protection as another uncertain weekend approaches can look to the WTI November $100/115 call spread using American-style options. Trading around $3.50, this spread provides $15 of upside protection with a max loss potential of only $3,500.

Singapore Fuel Oil hedgers looking to protect their upside can combine the above strategy with the purchase of 180 Fuel Oil Swaps in the WTI/Fuel Oil crack, currently trading around $19.32.

Singapore, 08:35

Market Jitters Result in Flight to Commodities

Energy markets rallied yesterday on the back of a flight to commodities from equities. Risky assets, at the moment being anything that is not gold or energy related suffered enormous losses in volatile trading. Weekly US inventory numbers drove crude prices sharply higher as the effects of Huricane's Gustav and Ike are now being quantified. Although draws were largely expected, crude stocks suffered an outsized dip for the second week in a row, down 6.3m million barrels, a reflection of the sharp weekly drop in imports.

Option premiums remain elevated as a result of the sharp market moves. Consumer call spreads will always be a cheap way to gain upside protection, especially in volatile markets. Using Asian options, the WTI Q4 $100/110 call spread can be purchased for an average price per month of about $2.80, or $2,800 of total premium at risk. This call spread can be purchased for zero cost with the sale of the Q4 $88 put.

Singapore, 08:00

Financial institution instability

Despite a US Fed bail-out of AIG, investment banks such as Morgan Stanley and Goldman Sachs felt the pressure today selling off as much as 40%. Energy prices rebounded as inventory data showed draws in crude, with more expected for next weeks reports. Traders reacted slowly but finally pushed prices higher based on the ongoing Nigerian conflict and short covering from recent sell-offs. Gold rallied sharply also as markets sought quality assets. Volatility remains high as we face one of the most trying financial markets (including commodities) on record. We must stress here that the NYMEX and ICE clearing models used by HCEnergy remain the most sound platforms for credit. OTC/ISDA contracts with companies such as Morgan Stanley could be at risk. We expect more derivative contract flow to move to NYMEX/CME and other cleared exchanges.

During these times of volatility, owning options is the best strategy versus trading futures.

Opportunity for Fuel Oil Traders and Producers to Lock in Downside Protection

Energy prices fell yesterday as markets focused on the looming question of AIG as well as the fall-out from Lehman's collapse. AIG, the world's largest insurer, sponsors the DJ-AIG, a large commodity index which dropped more than 2.7% yesterday as investors moved out $10bn worth of funds this week. Adding to counterparty worries this week was the bankrupty of Lehman Brothers. The impact on the bank's $5bn commodity index busines has yet to be quantified but the past week has displayed, if nothing, the outright dangers of trading OTC as well as the pitfalls of counterparty risk. Trading and clearing on an exchange such as NYMEX enables counterparties to avoid any and all of the current counterparty solvency issues.

Option premiums have increased significantly this week as a result of the market volatility. Producer put spreads present a cheap way to gain downside protection against further violent moves. Using Average Price Options, the WTI Q4 $90/75 put spread strip can be purchased for only about $3.70 per month. That's $11,100 of total premium at risk, providing $33,900 of downside protection throughout Q4. The strategy can be made costless by selling the Q4 $101 call strip.

Singapore 180 Fuel Oil hedgers looking to protect their downside can combine the above strategy with the sale of Fuel Oil Swaps in the WTI/Fuel Oil crack, currently trading around $9.19.

Singapore, 08:35

Market Plunge Presents Opportunities

Fundamentals may have taken a back seat for several days as traders attempt to adjust postions amidst a plunge in both commodity and equity markets. Yesterday saw crude oil down more than 35% in only two months time while the dollar seemed to have no support as well. Lost in the economic turmoil was Mend's openly declared "oil war" in Nigeria as a Royal Dutch Shell installation was attacked.

The current drop in commodity markets provides consumers with an excellent opportunity to lock in fuel prices more than 35% off the all-time highs. The WTI Q4 2008 $100/130 call spread can be owned for only $3.00 per month using Average Price Options. This call spread provides a $27,000 payout per month if the market rallies back to $130 with only $3,000 of total risk. The call spread can be made costless by selling the $88 put strip.

Singapore, 08:05

Financial turmoil forces liquidation

Overnight news confirmed the intention to sell ML to Bank Of America while Lehman Brothers filed for Chapter 11 to protect its' solid business units. AIG also suffered pressure to sell without any back up financing in place. The US fed is standing firm regarding no bail-out or back stop facilities.

While financial markets are under pressure, there may be some forced liquidations in the markets from ML customer or even index funds. Refined products are down more than 20 cents this morning, providing excellent opportunity for heating oil buyers to lock in a Q1 300-350 call spread for 13 cents/gallon. Crude oil volatility has popped as high as 55% for Wed expiry. There is plenty of room for the market to move $5 by Wednesday.

NY, 0900

Questions Remain as Ike makes Landfall

Energy markets traded tentatively on Friday as Hurricane Ike's ultimate landing point this weekend in Texas remained largely in question. On Friday, traders considered that up to 20% of US refining capacity may be in danger as well as access to the Houston shipping channel. Preliminary reports surfaced late in the weekend suggesting the storm may not have wreaked quite the havoc many analysts were predicting, however, final analysis of damage done to refining infrastructure and Houston's vital transport network will take at least a week.

Producers worried about support being removed from the market and looking to quickly lock in crude prices above the $100 level can take advantage of cheap option strategies using Average Price Options (Asian options). A producer price floor of $100 can be owned in the 4th Quarter of 2008 (Q408) for only $5.90 per month. This strategy can be made costless by selling the $103 call and locks in the hedger's crude oil price between $100 and $103.

All eyes on IKE

The storm should put even more pressure on refined products and cracks. We have seen cracks widen and volatility move out beyond 60% in RB. Physical players with inventory could sell some calls and collect big premium here.

As a lower risk trade, long inventory heating oil players could buy the Oct Euro heating oil put spread 260-280 for 7 cents or sell a 307 call in combination, making the whole structure zero cost. At-the-money is 293 here.

Gasoline is another story. The Oct-Nov spread is 1650 now down from 2000 today. We have heard that physical gasoline has traded as much as $1.22 / gallon over NYMEX, which means there are some short squeezes in the market. That spread could go out again. Our suggestion would be to own some call spreads for Nov Euro (or Oct Asian), which would not be subject to too much volatility compression. If the refinery complex is down for a few weeks, the compounding effects of low inventory and refinery downtime could have a dramatic effect.

Opec Draws Line at $100 Crude

Opec's surprise decision to reduce production below 29m barrels per day dominated trading in both Asian and NY markets. The decision to immediately adjust production to the lower quota level has caused many traders to wonder if the +25% drop in prices can continue. While Opec has certainly drawn a line in the sand around the $100 level, it remains to be seen if the cartel can actually achieve the cuts outlined in the announcement. An unsuccessful cutback in the short-term risks further downward pressure as Opec may appear divided and ineffectual.

The rangebound trading produced by Opec's announcement provides an excellent pause for consumers to lock in both the lower volatility (cheaper premiums) of late as well as 6 month lows in prices. Using Asian options, the WTI Q4 $115/130 call spread is currently trading around an average price of only $1.80. That's only $1,800 of total risk per month with total upside protection amounting to $39,600.

Consumer Hedgers Take Advantage of Recent Lows

Oil prices moved closer to the $100 level yesterday as traders bet Hurricane Ike would skirt crude production facilities in the Gulf of Mexico. High levels of production, as much as 80%, remain shut-in resulting in approximate losses of 10 million barrels. Traders however, view this as short-term news and have chosen to focus on the market's overall bearish trend. Opec, meanwhile is expected to announce no cuts in the current quota of 29.67 million barrels per day. Instead, the cartel will most likely unceremoniously pare back production to that previously agreed upon level, as excess production of about 700,000 barrels per day has been flooding the market.

Consumer hedgers can take advantage of the current bearish sentiment to lock in 6 month lows for the remainder of 2008 and all of calendar year 2009. Using Asian options, the Sept 2008 through December 2009 $110/130 call spread can be purchased for Zero Cost by selling the $89.50 put in the same tenor. This trades provides $20,000 per month for the next 16 months of upside protection above the $110 line with downside risk beginning only below $89.50.

Traders Eye Hurricane Ike and Opec Quotas

Traders remained focused on Hurricane Ike's unpredictable passage through the Gulf of Mexico as well as remarks eminating from an Opec advisory group as to how the cartel will proceed on the quota issue at Tuesday's meeting. Expectations are for the group to publicly hold back from adjusting the outright quota while paring back production to the original quota level. Opec has been watching nervously as crude inventories continue to rise against a backdrop of slowing economic growth.

Production quota levels remaining in place combined with the potential for the remainder of the hurricane season to proceed without disaster have led us to take a closer look at producer strategies. Using Asian options, the September through December $100/85 put spread provides $15 of downside protection per month with only $2.50 of premium at risk. That's a combined $60,000 per contract of total downside protection with $10,000 of maximum risk.

Producer Hedges Remain Cheap on Rangebound Trading

Energy markets continued their decline Friday as October WTI crude traded below $106 for the second time in a week. Traders are now focused on the medium-term trend line of approximately $95, which would signal a drop of more than 35% from highs reached in early July.

Downside protection remains cheap as option volatility has decreased in the rangebound trading as of late. The September through December $105/90 put spread strip is currently trading around an average monthly price of $3.90 using Asian options. With protection of $11,100 per month on a move below $90, this producer hedge provides protection for the remainder of the 2008 calendar year.

Volatility holding - Don't wait for the unexpected

When we look at volatility levels, it is often difficult to decide when it is well offered versus how cheap it might get. We have seen volatility decrease lately (to the low 40s), but the fact is, it could go lower. In these situations, using spread strategies continues to rule for buy and hold trades. For example, the Q4 115-125 call spread (Asian) is offered at $2.65. This is a low cost hedge for the remainder of the year for consumers. On the other hand, short term strategies or long physical (wet barrel) or inventory hedge players are better off buying outright options (in this case puts) to protect against a strengthening USD that might put more pressure on crude down to $100 or below.

Short term, we see potential risk from Hurricane Ike. This may put pressure on crack spreads and could also give some support to NG, which has experienced a very bearish market, with volatility in. We are suggesting a long futures strategy in NG with a put stop-loss for consumers.

It is always better to hedge when the market is stable and fear has subsided.

NY, Fri 430 PM EST.

Unanswered Questions Result in Rangebound Trading

Energy prices remain in limbo as the market awaits further news on possible damage done to Gulf of Mexico production facilities in the wake of Hurricane Gustav. The storm season has reached its peak, and once traders sense that another year has passed without major damage, prices may fall further. In the U.S., as well as several other European nations, oil stocks are sitting comfortably at the 10-year average, thus fueling speculation of an imminent production cut by Opec. What is more likely than a stern announcement is the cartel slowly lowering levels back to the original target rates. In fact, this may have already begun.

With so many questions regarding supply and demand unanswered, the market may continue to vacillate at 6 month lows until some answers are forthcoming. The recent range-bound trading has resulted in a sharp decrease in option premiums which consumer hedgers would be wise to take advantage of. Using Average Price Options (Asians), it is possible to own the WTI $110/125 call spread from September through December for Zero Cost by selling the $102 put in the same tenor. This trade allows the hedger $15,000 per lot per month of upside protection with no premium at risk above the $102 price level.

Consumer Strategies Highlighted

Crude oil prices were rangebound yesterday in both Asian and New York trading. While the verdict is still out on Hurricane Gustav's ultimate damage tally, structural harm at rigs and refineries appears to be limited. WTI crude is now trading safely below the 200 day moving average of $111.64 as the market attempts to identify the level where demand is restrained but not destroyed.

Option premiums have become increasingly cheaper in the wake of the volatility caused by Gustav. Consumer hedges in particular are looking quite economical for the remainder of 2008. The September through December $115/125 call spread is currently trading around $2.40. That's $2,400 of total premium at risk per month with $7,600 of protection should the market move back above $125 before the year is out. In other words, if only 1 month in the next 4 settles above the $125 level, the trade produces a profit of $400. Not a bad prospect for consumers considering the market is now down almost 30% in just over a month.

Option Premiums Cheapen

Front month crude oil dropped below $106 in Asian markets yesterday as traders moved beyond the short-term impact of Gulf of Mexico hurricanes. Compared to dire expectations, Gustav looks to have been a nonevent, although further assessment of production facilities is required before this pronouncement can be fully digested by the market. Energy markets appear to be looking for the level that restrains demand growth but does no destroy it and traders are now focusing on a lack of demand going forward due to what looks like a global economic slowdown. On the flipside, energy investor Boone Pickens said yesterday on CNBC that he sees Opec cutting production shortly in order to defend the $100 price level.

Option premiums have decreased significantly in the past 24 hours and consumer hedges have become much more affordable as a result. Zero cost upside protection from the $115 level to the $130 line can be owned from today until the end of calendar year 2008 by selling the $101 put in the same tenour. This trade locks in oil prices at $115 should the market move above that level and provides $15,000 of protection with no premium at risk at or above a price of $101.

Gustav downplayed

Early market action in London sent crude down as low as $105.65 as traders sold on news of lower than expected damage from hurricane Gustav. However, we have yet to see enough data regarding production lost from the shutdowns in the Gulf of Mexico over the last week. Additionally, delays in the Houston ship channel cannot be overlooked. The market did rebound over $110. NG showed very little resilience, ending down close to 70 cents / MMBTU. Consumers had a window of opportunity earlier today. Although some traders are calling for $100 crude, we may not have near term bear market conditions until the weather risk has subsided. The Q4 zero cost collar in WTI (Asian style) is now 100 put vs. 125 call. For the same period, a low cost call spread such as the 115-125 is offered at $3.25

Hedging Focus Moves to Global Economy after Gustav Weakens

Crude oil prices dropped below $111 yesterday as Hurricane Gustav quickly moved from "storm of the century" to probable non-event. More than 96% of oil production and 82% of natural gas production had been shut in, resulting in what many hope to be minimal damage to infrastructure. Traders are now focused on the lack of demand going forward in the next couple months due to a global economic slowdown. Opec's meeting in Vienna next week is also on the radar as Iran, Venezuela and Ecuador voice their displeasure at the recent fall in prices. No output cuts are likely at this juncture, so price may continue downward towards the $100 level.

Producers or physical players needing protection against further moves lower can look to the September through December $110/95 put spread vs. the $120 call using WTI Average Price Options. The put spread can be owned for free in every month remaining in the 2008 calendar by selling the upside call, thus giving the hedger about $8 of leeway should the market move higher. The spread provides $15 of immediate protection per month upon any move lower.

Questions Remain over Gustav's Heading

Traders ended last Friday with growing concerns as to the prospective path of Hurricane Gustav in the Gulf of Mexico. More than 25% of US crude oil production originates in this region, and while Gustav will hit landfall sometime in the next 12 to 24 hours, it may be weeks before the full extent of any enery production infrastructure damage is known. The Gulf region is also a large producer of Natural Gas, and while the storm has resulted in rallies in both crude and gas, it is the natural gas price that has fallen farther over that last couple months, resulting in the current 15 year high for the crude to natural gas price ratio.

Consumer hedgers looking for some cheap protection for the remainder of the hurricane season can still look to the liquid WTI Average Price Options (APO's). The September through December $120/135 call spread can be purchased for Zero Premium by selling the $109 put in the same tenour. This zero cost call spread provides $15 of protection above $120 for every remaining month in 2009. There is no premium at risk at or above the $109 level.

Crude Prices Remain +$115 after IEA Announcement

Crude oil bounced off recent highs yesterday as the International Energy Agency attempted to allay supply disruption fears. The IEA announcement that strategic oil reserves could potentially be released upon disruption to oil and gas production as a result of Hurricane Gustav had a calming effect on the market. Meanwhile, prices remain +$115 as deep-water rigs continue evacuation procedures. Production is expected to be shut in for a minimum of 5 days.

With yesterday's drop-off in prices, consumer hedgers are seeing a short-term reprieve before the long weekend, with many unanswered questions regarding Hurricane Gustav. The Q4 $120/135 call spread strip can be purchased for Zero Cost by selling the $107 put in the same tenour. This trade allows the consumer hedger $15 of protection per month for Q4 with no premium at risk above $107.

Premiums Strengthen on Hurricane Predictions

Energy prices rose yesterday as Hurricane Gustav moved closer to the oil and gas producing region of the Gulf of Mexico. While landfall is not expected until Monday, the approaching weekend has pushed many market participants to either go long or at least square-up any short speculative positions. This has resulted in the steady march back up towards $120 and a strengthening in crude oil option premiums. Not only upside call buying has been prevelant, but the market has seen traders scoop up cheap downside protection in the bet that Gustav will be a nonevent, resulting in a large downward move next week.

Cheap short-term downside protection is still available in the Q4 $110/100 put spread strip. For only $2,500 of total exposure per month, this trade provides protection of $7,500 per month on the event of a sharp move lower- just such a move which traders are looking for if Gustav fails to move in the direction of oil production facilities.

Storm Warnings Result in Volatile Trading

Volatile trading in energies is expected to continue for the next 5-10 days as the market attempts to predict landfall for Hurricane Gustav in the Gulf of Mexico. Landfall is slated for Monday, leaving little prospect of follow-through on any movement for the remainder of this week- conflicting news and weather models will push and pull the market as fresh information is digested by traders. From the fundamentals side it looks as if the market is searching for that equilibrium level where demand growth is restrained but not destroyed.

Heading into this uncertain weekend with dark storm clouds on the horizon, there are yet many cheap short-term consumer hedge strategies available. The WTI $120/130 call spread can be purchased for Zero Cost in every month from October through December 2008, by selling the $104 put in the same tenour. If Hurricane Gustav disrupts supply this weekend, the hedge provides $10 per month of upside protection with no premium at risk above $104.

Bearish Supply News finds Crude Oil Rangebound

Crude oil prices bounced off recent lows yesterday but remained range-bound as the U.S. approaches the long Labor Day holiday weekend. Bearish supply news has been paramount as of late, with Opec apparently pumping between 0.5m and 1m barrels per day above it's original August target. This has led to speculation of a production cut at the cartel's upcoming September 9th meeting, however de facto leader Saudi Arabia has yet to voice concerns over current market prices. Traders are watching whether the market can break below the current support level of $110-112, a level which has held under several bearish pushes lower over the past several weeks.

As the market is currently sitting in the middle of the $110-120 range, consumer hedgers should look to lock in protection ahead of the long holiday weekend in the U.S. With a potential hurricane on the horizon, short-term upside protection can be found in the Q4 Zero Cost $115/125 call spread. This spread provides $10 of immediate upside protection by selling the $107 put in the same tenour and there is no premium at risk in this trade above that level.

Reprieve for Consumer Hedgers

Crude oil prices retreated yesterday in a mirror image of Friday's dramatic rally. While further distruptions to Azeri crude supplies remains the number one topic on trading floors, a recent report from consultancy Petrologistics highlighted that Opec's current production is almost 1m barrels per day higher than it's actual target. While this data is bearish in the short-term, it provides increased fodder for those Opec nations looking to have production levels decreased at the organization's upcoming meeting on September 9th.

Consumer hedgers were given a reprieve on Friday as October crude oil settled below $115 just one day after breaking $122. Once again, the opportunity to lock in a price ceiling of $120 for zero premium for 2009 has presented itself. By selling every $112 put in the same tenour, it is possible to have a price floor and price ceiling between $112 and $120 for the entire 2009 calendar year.