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.

Markets Wake Up to Predicament Between Russia and West

Crude oil pushed back above $120 yesterday on mounting tensions between Russia and the West. Diplomatic protests are a given at this point, but Russia also has at its disposal the ability to seriously curtail oil exports. The market appears to finally be waking up to a problem that began more than two weeks ago. The silver lining of the recent bump in prices is that less bullish rhetoric is likely by Opec nations ahead of the September 9th meeting. With prices remaining above $110, it was unlikely a decision would have been made to curtail output, but with a new range possible above $120, the focus is now on whether the market will continue to push to even further heights.

Consumers who locked in hedges while crude prices hovered around the $115 range certainly took advantage of cheap option premiums. Deals still abound however, as does a high level of uncertainty in the market. For short-term protection, the October through December 2008 $125 / 135 call spread can be purchased for Zero Cost by selling the $108.50 puts in the same tenour. This trade gives the consumer $10 of upside protection for the remainder of 2008 while putting no cash at risk above the $108.50 level.

Volatility pop

The early signs of hurricane risk were magnified when new information regarding Russian military movements hit the wires. Options volatility rapidly increased well over Wednesdays levels. Crude oil quickly was up more than $5.0/bbl and refined products over 14 cpg. As mentioned by previous posts, there is plenty of upside risk to consider. Product options expire Tuesday. Please IM, email or call for strategies prior to the weekend. Also note that Monday is a bank holiday in the UK and traders most likely will not go out short.

Tropical Storm Fay

NHC more bullish this AM - Crude up over $118 early NY time after London open had kicked off a small rally. Fay has a chance of making its way to the Gulf but reports are inconclusive currently. Traders are looking mostly to cover and remain neutral to long coming into this weekend. The bank long weekend in the UK may give more incentive for traders to go out long. In this case, short players can pick up long call spreads. Long players may be able to collect good premium for the 128 calls and perhaps add puts as a collar. The September Asian zero cost collar is now 110 put versus 128 call.

NY, 0850

U.S. Inventory Data Produces Increased Volatility

Energy prices showed marked volatility yesterday as a result of surprising U.S. inventory numbers. Crude stocks saw a build of 9.4m barrels last week, largely as a result of swelling imports. Converesly, petrol inventories provided an equal surprise on the downside, showing a draw of 6.2m barrels, marking the second week in a row of +6m draws. This can be blamed on both a weak refinery margin, where refiners will often choose to forego further production in favour of much-needed maintenance programmes, as well as disruptions caused by the previous tropical storm, Edouard.

Volatility often results in hedgers backing away from the market for fear of incurring added risks to their balance sheet. In fact, a volatile market is just the scenario for choosing options as a proper hedge over futures or swaps. Options provide cheaper protection as well as limited loss, allowing the prudent hedger to concentrate on their actual business and not worry about basis or downside hedging risk. Just such a consumer hedge would be buying the January through December 2009 $130 / 150 call spread for Zero Cost by selling the $105 / 93 put spread in the same tenour. This trade provides $20 of upside protection for every month in 2009 while having only limited risk, from the $105 level down to the $93 strike ($20 of free protection in exchange for $12 of max risk).

AP Story featuring HCEnergy

AP
Oil prices rise ahead of inventory report
Wednesday August 20, 9:41 am ET
By Pablo Gorondi, Associated Press Writer

Oil prices rise as investors look to inventory report for signals on US demand

Oil prices rose above $116 a barrel Wednesday as investors awaited a weekly crude inventory report which was predicted to show a drop in U.S. gasoline stocks.

By the afternoon in Europe, light, sweet crude for September delivery was up $1.55 to $116.08 a barrel in electronic trading on the New York Mercantile Exchange. Earlier in the session, it traded as low as $114.26 before rebounding. The contract rose $1.66 to settle at $114.53 a barrel on Tuesday.

Investors are waiting for a report later Wednesday by the U.S. Energy Department's Energy Information Administration on U.S. oil stocks for the week ended Aug. 15. The petroleum supply report was expected to show that gasoline inventories fell by 3 million barrels, according to the average of analysts' estimates in a survey by energy information provider Platts.

"People are going to be looking at the (gasoline) numbers," said Jonathan Kornafel, Asia director for brokerage Hudson Capital Energy in Singapore.

The Platts survey also showed that analysts projected oil stocks rose 1.7 million barrels and distillates went up 1.2 million barrels during last week.

Tropical Storm Fay -- which contributed to higher oil prices over the past few days -- moved inland in the United States on Tuesday, bypassing oil and gas platforms in the Gulf of Mexico.

Energy markets, however, were still nervous, as some computer models showed Fay possibly becoming a "boomerang storm" and moving back toward the Gulf, said Olivier Jakob of Petromatrix in Switzerland.

JBC Energy in Vienna, Austria, also mentioned "hurricane risk" as one of several factors supporting oil prices.

Tuesday's comments from Venezuelan Oil Minister Rafael Ramirez about a possible proposal at the September OPEC meeting to cut output if prices continue to fall lent support to prices.

Oil prices have rebounded after falling about $35, or nearly a 25 percent, from their trading record of $147.27 on July 11 on expectations that high gasoline prices and slowing economic growth in the U.S., Europe and Japan will undermine global energy demand.

"Just as the market overshot to the upside, it overshot the other way," Kornafel said. "It looks like we're consolidating between $112 and $118."

Weighing on oil prices was a slightly stronger dollar. The 15-nation euro traded was down to $1.4721, while the dollar rose near 110 Japanese yen. A rising dollar encourages investors who had been seeking commodities like oil as a hedge against inflation to sell their positions.

"I think credit markets need to improve in the U.S. before we see a sustained rally in the dollar," Kornafel said. "We may have hit a top for the dollar. I don't think this rally can last."

In other Nymex trading, heating oil futures rose 4.44 cents to $3.1681 a gallon, while gasoline prices added 4.11 cents to $2.9050 a gallon. Natural gas futures increased 16.1 cents to $8.137 per 1,000 cubic feet.

In London, October Brent crude gained 91 cents to US$114.96 a barrel on the ICE Futures exchange.

Associated Press writer Alex Kennedy in Singapore contributed to this report.

Market Consolidation Continues

Energy prices rallied ahead of Wednesday's U.S. oil inventory numbers. Gasoline stocks are expected to show a slight draw while crude supplies may register a modest build. Increasing tensions between Russia and Nato over continued military activity in Georgia, as well as resurgent fears over tropical storm Fay in the Gulf of Mexico served to pull oil off its recent lows. Consolidation between $112 and $118 continues.

As market participants become increasingly unsure as to crude oil's next move, option premiums continue to cheapen. Unlimited upside protection for the remainder of the 2008 calendar year can be had for Zero Cost by offsetting the purchase of the WTI September through December $120 calls by selling the $113 puts in the same tenour. Using Average Price Options, it is possible to gain protection above $120 for the remainder of 2008 with no premium at risk above $113.

Don't discount the risk before mid Sept.

Following Monday's easing of volatility in petroleum, the market has shown its fragility to potential weather event risk. We know that the seasonal peak is not for a few weeks so there is no discounting the potential for some activity affecting the Gulf of Mexico. Tropical storm Fay has not posed any threat as of now, but don't assume the risk is gone. If Fay fizzles, there could be something around the corner coming into September.

Given the easing volatility in the market (read less buyers than sellers of optionality), now is a good time to buy upside insurance. Asian style crude call options with a $125 strike for the September through December strip were offered today at $5/bbl. For lower premium trades, look to the $135 strike for $2.75.

NY, 530pm, Aug 19

Option Premiums Cheapen on Range-bound Trading

Energy markets were volatile on thin volumes yesterday before settling close to unchanged. Market consolidation continues in crude oil between the $112 and $118 levels due to hurricane threats in the Gulf of Mexico balanced by hedge funds continuing to increase short positions. Tropical storm Fay appears at this point to be a non-event in oil production terms, however the hurricane does serve as a reminder that external factors can raise volatility without a moment's notice.

The lack of movement in the last two trading sessions has served to temporarily decrease option premiums, thus making consumer as well as producer hedges look much more attractive. A WTI crude oil $20 price ceiling from the $130 level to the $150 level for the entirety of 2009 can now be locked in for Zero Cost by selling the $85 put in the same tenour. With no premium at risk above $85, this trade locks in $20 of protection above $130.
IM or email for further strategies and ideas.

Market Recap; $120 Consumer Price Ceiling

Crude oil dropped below $115 on Friday as renewed selling served to push the market to the bottom of the recent range. This, in spite of continued tensions between Georgia and Russia surrounding key pipelines carrying crude oil to Turkey from the Caspian Sea. Adding to the pressure was the continuing strength of the U.S. Dollar and inflation fears which have presently been pushed to the background.

Consumer hedgers can now lock in a price ceiling of $120 for the remainder of the 2008 calendar year with the October through January $120 call. The price ceiling is paid for by locking in a price floor at the $111.50 level for the same time period. As this is a zero cost trade, there is no premium at risk above the $111.50 level.

Crude finds new lows, consumer hedgers alert

Options markets increased implied volatility today as ranges remain wide for the September WTI option expiration.   Talk of open interest at the $110 level may have helped drive the market toward that strike.  

There seems to be enough sellers of out-of-the-money calls for the balance of the year, favouring a short call strategy to long put strategy.  This may be due to the optically large premium one can collect.  Traders also envisage a stall here in the market in the 100-110 range.  This would potentially decrease volatility sharply, making options less valuable.  

That said, we cannot stress enough the upside risk in the near term.   Weather risk is still a factor for September.   The conflicts in Georgia could have a serious affect also on supply.   For consumer hedgers looking to hedge 2009, this may be a better time than September or October to buy some level of call protection.  The Cal 9 (Asian) 120-150 call spread is offered at @7.60/bbl.  

Fri. 230pm NY

Retracement and Consolidation

Energy markets yesterday gave back most of the gains from Wednesday's session as larger than expected demand destruction in OECD nations looks to have trumped concerns over non-Opec supplies. Inventory data throughout the developed world continues to remain at record low levels, possibly preventing a continuation of the sharp move lower we have been witnessing.
Crude prices at levels $30 below the highs do not appear to have renewed demand growth.

Instead, with markets expected by many to continue consolidaing around $110, current levels look like an excellent opportunity to adjust consumer hedges ahead of a potential move higher in 2009. With this in mind, the 1st half of 2009 $130 / 170 call spread can be owned for Zero Cost by selling the $95.50 put in the same time frame. This trade allows a full $40 of upside protection for every month from January to June of 2009. the protection is paid for by selling the $95.50 put, $20 below the current flat price.

Consumer Hedges in Focus after Bullish Data Release

Energy markets rallied yesterday following bullish U.S. inventory data showing a decline in crude stocks of 400,000 barrels. The surprise drop is indicative of the impact of hurricanes in the fragile Gulf region, as much of the blame for the declining stocks is placed on tropical storm Edouard for disrupting imports. US refiners have also been producing less product as their margins continue to shrink; maintenance programs are expected to continue well into autumn of this year. The end result was a rally of more than $4 in front-month WTI crude.

Upside consumer hedge strategies continue to remain cheap, as hedge funds and short-term traders focus on the 200-day moving average lurking on the downside. Protection from further moves higher can be found in the January through June $130 / 140 call spread for $2.40. For an average price of only $2,400 per month, this trade pays $7,600 of upside protection. The hedge can be mated with the $83 put to make the entire trade zero cost, thus providing $10,000 of upside protection.

Bullish gasoline stats/weather push market higher

A surprise gasoline draw helped push the market higher today, yet product cracks were not overly bullish. Crude was up as high as $117.46 by midday and those who took advantage of low cost options strategies and short covers rejoiced. There is some model information pointing to weather risk coming out in the next week or two, which contributed to the NG rally that subsided late in the day (NG up only 15 cents). This weather may also affect crude supply, so be advised.

Call strategies still remain our recommendation for hedgers that remain low on inventory. The September American/Euro style crude options will expire next Wednesday, so look to the September Asian or October American/Euro for near term hedges. Volatility is still firm.

Longer term, the Q4 120-140 Asian WTI call spread is offered at $4.00. This still looks like a good buying opportunity.

NY: CT (3PM EST)

A Fresh Look for Consumer Hedges

A second day of consolidation around the $115 level served to decrease implied volatility in the energy markets yesterday. Competing forces continue to pull the market in two directions: crude and product inventories throughout the developed world remain dangerously low and a recent IEA report cited inventories in the second quarter of 2008 grew at their slowest rate in more than a quarter century. The report also found that while demand appears to be easing heading into 2009, there will be a "renewed tightening thereafter". The U.S. Gulf hurricane season remains on many trader's radar, as a newly formed tropical storm has yet to determine its path through the oil-rich locale.

Long-term upside hedges are consequently getting renewed attention as of late. The 1st Half of 2009 $125/140 call spread strip in WTI has been trading around $3.50. For total risk of only $3,500 per month, this trade enables the consumer hedger to enjoy $15 of protection from January through June of 2009 should the market rally back towards $140.
IM or email for further strategies and quotes.

Decreased Volatility results in Cheaper Consumer Hedging Strategies

Crude oil prices consolidated around the $115 level yesterday despite escalating fighting between Russia and Georgia amidst the oil-rich Caspian region. Possibly below the radar now are increased tensions between Iran and the West over the Middle-Eastern county's nuclear program. Hedge fund short crude positions appear to be both driving the market lower and preventing any sort of rebound. However, with a drop of more than 20% in one month's time, hedger's have been focusing on locking in the current price, whether it be a South American producer buying downside protection or an Asian airline recognizing the need to protect against a possible move higher in the second half of the year.

Option premiums are becoming cheaper as the market adjusts to the $110-120 price range. The October $125 calls are now trading around $3.30, providing unlimited upside protection for the next month if prices rebound. A maximum investment of only $3,300 protects against the many risks we see prevalent in the market today: political, military, weather, and supply and demand.

Commodity sell-off bifurcates

We have witnessed a broad commodity sell-off over the last month, which has potentially hit a crossroad. US dollar strength has put pressure on gold and petroleum, and metals demand in is clearly weak in general due to industrial production. However, we see petroleum with substantial upside risk. News regarding the former Soviet states self-organizing to rally behind Georgia is one piece of bullish news that helped bring the market back to $115 from a low of $112.72 today. To protect upside risk, consider the September WTI Asian 120-130 call spread for $2.50 / bbl - a $10 wide payment with good leverage. To achieve a lower cost, the 130-140 call spread costs $1.25/bbl. In the event of a market surprise on the supply side, this would provide excellent protection. Also to note: back month crude volatility has been steeply discounted. Consumer hedgers looking for longer term protection have an improved cost profile.

Traders Speculate if Price Drop is Overdone

Energy markets plummeted and the U.S. Dollar rallied in trading on Friday as hedge funds continue to exit short dollar/long crude positions. With tensions between Iran and the West worsening, an actual war going on between Russia and Georgia, militant strikes in Nigeria increasing again, and a U.S. Gulf hurricane season that can still bare its teeth, the drop in prices is starting to look overdone. Just as with the move on the upside to $147, this downward push appears to have exceeded its mark and a correction may be upcoming.

Hedgers looking to lock in prices at the lowest levels we've seen in months have been pricing the October through January $120 price cap against the $113 price floor. This trade enables the owner to have oil prices capped at $120 for the remainder of the 2008 calendar year while putting a price floor in at $113. The trade requires Zero Premium, and as such there is no option decay associated with the hedge.

Pipeline Attack Reveals Upside Price Dangers

Energy prices experienced a day of respite after Kurdish militants damaged a key crude pipeline in eastern Turkey. While the pipeline is substantial and can handle up to 1m barrels a day, the incident serves to highlight upside issues in the supply/demand spectrum that may be overlooked at the moment. World inventory levels remain at discouragingly low levels and Opec spare capacity, as well as that of non-Opec producers, continues to decrease. Until these issues are resolved, the threat of oil prices returning to levels above $130 will remain with us on a day-to-day basis.

With this in mind, hedgers may want to lock in at least 50% of their 2009 fuel needs using inexpensive option strategies. $20 of upside protection is available for Zero Premium by purchasing the $130 / 150 call spread strip for every month in calendar year 2009. The price of owning the call spreads is offset by selling every $88.50 put in 2009.

Take advantage of easing volatility

New York, 5pm Thursday Aug 7, 2008

The market tested lows below $118 today but rejected a breakdown, ending up over $120. Technical analysis pointed to reversals in most products and volatility was being reduced by traders. We expect to see stronger RB cracks in the coming days while heat cracks have likely seen the majority of their sell off. However, we are not taking any positive bias yet with the heat crack.

This market favors buying options coming into the weekend. Fridays often provide buying opportunities as traders reduce positions fearing the cost of decay. Those looking to take a long position should look at the well offered September American $130 call offered 60 cents/bbl. This only has 1 week to expiry but provides insurance against an Olympics "event". Furthermore, we are in hurricane season now and the next two weeks may provide some interesting data. For those hedging hurricane risk, buy RB calls. A September $3.20/gal RB call is offered at $0.065/gal, providing good insurance in the event of refinery issues.

The Olympics provide an odd sense of peace in the world for the moment. Bush will be in attendance with some 70 other heads of state in Beijing.

Options for Downside Protection

U.S. oil inventory data showed a rise in crude stocks last week, reinforcing the current bearish trend. WTI front month crude came close to touching the $117 level before bouncing back above $118.50. The slow entry into the market by downside hedgers has been somewhat offset by Tuesday's purchase of December 2008 $100 puts by a Latin American producer. Sellers of the downside protection must sell futures to protect against their short put position, thus adding to the current bearish sentiment.

A popular trade continues to be buying the December 2008 $100 put for around $4.00. This trade provides unlimited downside protection below $100 until November 17th, when the option expires. Longer-term downside protection can be owned by purchasing the December 2008 through March 2009 $100 / 80 put spread strip, also for $4.00. For the same price per month for just the December 2008 $100 put, a hedger can buy every $100 put from December 2008 through March 2009 by selling every $80 put for the same months. This trade provides $16,000 of downside protection per month with max loss of only $4,000. For the hedger that expects a further downside push sometime in the next 6 months, this trade should fit perfectly.

Statistics out, range in

DOE +1.6 CL RB -4.3 HO +2.8
API CL -2.5, RB -1.8, HO +3.1

After API data was released early, crude rallied until DOEs put a damper on things and the day remained range bound. RB was the only ray of hope on the bullish side with draws against a backdrop perception of falling demand. Heat cracks came in further today down to $17.25 /bbl referencing September futures. This level is back to a range that should be more appealing to consumer hedgers. However, the heating oil distribution industry and diesel market seems to be slow to take advantage of this opportunity, awaiting even lower prices. There has not been significant put activity to suggest a great fear of a quick move lower.

Hedgers needing inventory protection are wise to look at out-of-the-money puts that are reasonably valued by the market.

As a footnote, financial markets continued the rally launched Tuesday. Energy equities suggest the Monday selloff was an overreaction to weakening crude prices. Additionally, the USD continues to strengthen against major currencies.

Securing Upside Protection While All Eyes are on the Downside

Crude oil pushed below $120 early in the trading session and while the market settled below that pivitol level the lows reached during Asian hours held strong. Traders were abuzz with news of a large Latin American producer entering the market to purchase downside protection in the form of the December 2008, $100 puts. It was the smart money that locked in these puts while the market was trading on its highs above $140. To purchase these puts now is a wise decision to protect from further downside moves, however, the even wiser move is to purchase the same protection when it is ultra-cheap. During the almost 2 weeks that the market traded above $140, the December 2008 $100 puts were trading around $1.00. Yesterday's purchases by an unnamed Latin American producer pushed the bidding price well above $4.00.

The incident described above can be applied to any hedger worried prices may move back towards the $150 level. The December 2008 $150 calls, once trading at more than $11.00, are now valued at around $4.00. With maximum exposure of only $4,000, a hedger can have unlimited protection above $150 should the market move above that level before the December options expire. With an uncertain hurricane forecast, weak inventory and supply data as well as an ambigious letter from Iran on the nuclear issue, buying upside protection after hitting 2-month lows looks like where the smart money is heading now.

More commodity weakness, USD stronger

The commodity selloff continued today although crude lows were set early in Singapore trading hours. The current feeling is we still have some more room to go on the downside. NG fought to go higher but in the end came off about $0.07. We will see what tomorrow's EIA numbers bring to petroleum markets Wed AM.

The Fed left rates unchanged as expected, citing inflation is still atop their list of concerns. Equity markets rallied, which also lifted the energy equities despite weaker petroleum prices. The USD strengthened against the Euro and other major currencies.

Vol remains firm awaiting the statistics Wednesday. For those long volatility, consider selling the options before the numbers. If numbers are bullish, we may see consolidation back to $120 and a vol sell off. Keep in mind, technicals are indicating support levels in the 113-116 area. If vol does come in, the short inventory players should consider hedging by adding some calls at the 130 or 140 level for October or Q4.

CT, New York. 4:30pm Aug 4.

Possible Macro-Economic shock on the horizon leading to lower Energy Prices?

Energy prices plummeted yesterday on the back of new data citing increasing damage done to the wallets of US consumers. Unfortunately, it has not been increasing supply, safe and plausable energy alternatives, or simply a more conservative demand climate that is pushing the crude price lower. What we're seeing now is possibly the beginnings of a macro-economic shock resulting from the recent high prices that is now pulling all commodities lower.

Too many potentially bullish factors remain in the mix to delay locking in these lower prices. Every $125 call from September through January in WTI Crude Oil can now be purchased for Zero Cost by selling the $119 put for the same months. This trade puts a ceiling of $125 on your hedging costs for the remainder of the 2008 calendar year while also placing a floor in the market at $119.

JK, HCE Asia (Singapore)

Commodities liquidation

New York, 17h00 Monday Aug 4.

Many commodities experienced a sell off today including energies. Energy equities also experienced a steep single day sell off, potentially foreshadowing weakening market confidence. Although ending the day $4 lower with range of $6.5 / bbl, this could be considered a normal day. The September crude straddle valued at $9 on Friday was fairly valued given these ranges. NG was off 7% with an rumor off a major fund liquidating. CL vols were a little bid and HO vols were a little weak.

An early rumor of a conciliatory letter expected from Iran Tues and hurricane Eduardo being a non event were reasons cited for the CL selloff. While real demand destruction is being witnessed in North America, we cannot yet confirm the post Olympics shift in demand from China and related markets. We are seeing lower demand from Chinese importers, which may reverse post Olympic restrictions on industrial manufacturing.