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.