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
Thursday, October 30, 2008
Wednesday, October 29, 2008
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
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
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
Tuesday, October 28, 2008
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
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
Monday, October 27, 2008
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
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
Thursday, October 23, 2008
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
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
Wednesday, October 22, 2008
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
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
Tuesday, October 21, 2008
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
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
Sunday, October 19, 2008
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
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
Thursday, October 16, 2008
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
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
Wednesday, October 15, 2008
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
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
Tuesday, October 14, 2008
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
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
Monday, October 13, 2008
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
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.
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.
Sunday, October 12, 2008
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
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
Thursday, October 9, 2008
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
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.
Wednesday, October 8, 2008
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
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.
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.
Tuesday, October 7, 2008
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
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.
Monday, October 6, 2008
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
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
Sunday, October 5, 2008
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
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
Friday, October 3, 2008
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
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
Wednesday, October 1, 2008
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
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
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