Oil markets remained pensive on Friday ahead of Opec's sideline meeting in Cairo. As expected, the cartel did not announce further production cuts, however the markets may be stirred during Asian trading Monday morning as a result of Saudi Arabia's price targeting. In a rare step outside of typical form, Saudi Oil Minister Ali al-Naimi targetted $75 as a fair and reasonable price level. In late-day trading in NY, bargain hunters bid up the June 2009 $75 calls.
Similar consumer strategies have been targeted in WTI for mid to late 2009 when global crude demand may begin to return. Using Asian options, the July through December 2009 (2H09) $80/100 call spread strip is offered at about $2.70 ($2,700 of total premium at risk per month with a maximum payout of $17,300 per month). The call spread strip can be purchased for Zero Cost by selling the $48 put in the same tenor. With the 2H09 swap strip trading above $64.00, downside risk on this Zero-Cost 3-Way does not begin for more than $16.00.
Singapore, 16:00
Sunday, November 30, 2008
Wednesday, November 26, 2008
Bounce off $50 Highlights Consumer Protection Strategies
Added stimulus to the ailing Chinese economy provided the backdrop for a rise in commodity prices as crude oil once again bounced off the $50 level. Current demand destruction was highlighted by the US stock data showing large inventory increases for both crude oil and unleaded gasoline. These numbers emphasize the plight of Opec; the cartel has struggled to cut production at a rate which would reduce stocks in competition with plummeting demand. The group continues to tread one step behind the market, although recent gains in equities combined with the crude market falling almost $100 in 4 months appear to have placed a temporary floor under the oil price.
Yesterday's rally from $50 resulted in lower implied volatility and therefore cheaper option premiums. Consumer hedges have come into the spotlight again with traders looking at the WTI Asian-style Q109 $65/75 call spread strip, currently trading around $1.90 ($1,900 of total risk against $8,100 of profit potential per month). For the same risk exposure but with a larger band of upside protection, traders have also been quoting the WTI Asian-style Q109 $70/90 call spread strip, currently trading around $1.90 ($1,900 of total risk against $18,100 of profit potential per month).
Singapore, 06:30
Yesterday's rally from $50 resulted in lower implied volatility and therefore cheaper option premiums. Consumer hedges have come into the spotlight again with traders looking at the WTI Asian-style Q109 $65/75 call spread strip, currently trading around $1.90 ($1,900 of total risk against $8,100 of profit potential per month). For the same risk exposure but with a larger band of upside protection, traders have also been quoting the WTI Asian-style Q109 $70/90 call spread strip, currently trading around $1.90 ($1,900 of total risk against $18,100 of profit potential per month).
Singapore, 06:30
Tuesday, November 25, 2008
Renewed Push Lower for Crude Oil
Crude oil prices dropped sharply on Tuesday, reversing much of the gains enjoyed in the 2-day rally surrounding the weekend. The downward move pushed implied volatilities higher as producer hedgers moved to protect their downside. The 10% rally that began late last week enabled those traders that are long physical to buy downside puts (which become cheaper as the market moves higher). The lower implied volatility of the past few days only added to the incentive to lock-in cheap protection.
As the market has now retraced much of the recent gains, a renewed emphasis is on how low this market can push in the short-term. Bargains remain in near-term downside protection: using Asian options, the WTI January $40 puts are trading around $1.00 ($1,000 max exposure for 1000 barrels of protection). WTI crude need not trade below $40 for these puts to be profitable, any near-term movement lower may result in a sharp jump in the premium of this option. Traders can also opt for the January $30/45 put spread, currently trading around $1.10.
Singapore, 08:00
As the market has now retraced much of the recent gains, a renewed emphasis is on how low this market can push in the short-term. Bargains remain in near-term downside protection: using Asian options, the WTI January $40 puts are trading around $1.00 ($1,000 max exposure for 1000 barrels of protection). WTI crude need not trade below $40 for these puts to be profitable, any near-term movement lower may result in a sharp jump in the premium of this option. Traders can also opt for the January $30/45 put spread, currently trading around $1.10.
Singapore, 08:00
Monday, November 24, 2008
Citi Rescue Sparks Commodity Rally
Citigroup led the way yesterday as the beleaguered financial institution found itself backed by the US government- pulling both equities and commodities higher while the dollar lost strength on funding questions. January WTI pushed back towards $55 for its second consecutive rally as hedge funds shifted from a multi-year short position back to one of being long.
While the extend of the current rally may be debatable, consumer hedgers who have been taking advantage of cheap upside protection in the form of the February WTI $80 calls have enjoyed recent profits. While the $80 calls are now trading around $1,600 per 1000 barrels, the $70 call can be owned for even less premium by selling the Feb $90 call. This vertical call spread is currently offered at only $1,250 per 1000 barrels with a maximum payout of $18,750 should the rally in crude oil push the market back above $90.
Singapore, 07:30
While the extend of the current rally may be debatable, consumer hedgers who have been taking advantage of cheap upside protection in the form of the February WTI $80 calls have enjoyed recent profits. While the $80 calls are now trading around $1,600 per 1000 barrels, the $70 call can be owned for even less premium by selling the Feb $90 call. This vertical call spread is currently offered at only $1,250 per 1000 barrels with a maximum payout of $18,750 should the rally in crude oil push the market back above $90.
Singapore, 07:30
Sunday, November 23, 2008
Consumer Protection Strategies
Energy markets continued to push lower Friday as December RBOB unleaded gasoline traded below $1.00 for the first time in two years. January WTI crude oil settled under $50, marking a fall of almost $100 in only 4 months. While a protracted global recession will continue to hamper demand well into 2009, supply-side problems that originally pushed oil towards $150 have not disappeared. Thus, it is imperative for consumer hedgers to take advantage of the myriad of bargains in the highly liquid WTI options market.
Using Average Price Options (Asians), the WTI 2nd half of 2009 $85 call is currently trading around only $3.25. That's maximum exposure of only $3,250 per 1000 barrels/month to be long at $85 for every month from July 2009 through December 2009. Even cheaper, the $85/105 call spread strip in the same tenor has been trading around $1.50. With max exposure of $9,000, this trade has a potential payout of $111,000 should crude move back above $105 in the second half of 2009.
For Bunker Traders short physical and looking to buy the Singapore 180 or 380 swaps, cheap downside protection can be had by partnering the long swaps with the purchase of the American-style January 2009 $35 puts for only about $400 per 1000 barrels. Crude need not trade below $35 for the puts to provide protection against long swaps, any move lower in the next 2 weeks will result in an increase in value of the puts, partially offsetting any losses from the long swaps.
Singapore, 21:00
Using Average Price Options (Asians), the WTI 2nd half of 2009 $85 call is currently trading around only $3.25. That's maximum exposure of only $3,250 per 1000 barrels/month to be long at $85 for every month from July 2009 through December 2009. Even cheaper, the $85/105 call spread strip in the same tenor has been trading around $1.50. With max exposure of $9,000, this trade has a potential payout of $111,000 should crude move back above $105 in the second half of 2009.
For Bunker Traders short physical and looking to buy the Singapore 180 or 380 swaps, cheap downside protection can be had by partnering the long swaps with the purchase of the American-style January 2009 $35 puts for only about $400 per 1000 barrels. Crude need not trade below $35 for the puts to provide protection against long swaps, any move lower in the next 2 weeks will result in an increase in value of the puts, partially offsetting any losses from the long swaps.
Singapore, 21:00
Thursday, November 20, 2008
WTI Drops Below $50
Energy markets mirrored equities once again yesterday as WTI crude oil pushed below the $50 level. The front-month contract has now fallen almost $100 in only 4 months in the face of crashing world-wide demand, no short-term supply problems, still elevated stock and inventory levels, depleted investor positions and renewed shorting by hedge funds.
First quarter 2009 puts continue to attract attention from both producer hedgers and traders. Using Asian options, the WTI Q109 $30 puts are still trading at relatively cheap levels, only about $600 per 1000 barrels of crude. For more immediate downside protection, producers can look to the Q109 $35/45 put spread strip. Currently trading around only $2,500 per month per 1000 barrels, this hedge offers a total payout of $22,500 at or below $35.
Singapore, 09:00
First quarter 2009 puts continue to attract attention from both producer hedgers and traders. Using Asian options, the WTI Q109 $30 puts are still trading at relatively cheap levels, only about $600 per 1000 barrels of crude. For more immediate downside protection, producers can look to the Q109 $35/45 put spread strip. Currently trading around only $2,500 per month per 1000 barrels, this hedge offers a total payout of $22,500 at or below $35.
Singapore, 09:00
Wednesday, November 19, 2008
Short-term Producer/Long-term Consumer Strategies Highlighted
Oil futures on NYMEX pulled back yet again yesterday as commodity markets continue to mimic those of equities. As traders wait for further proof of Opec cuts (and debate the likelihood of another cut before year-end), the lack of any positive news on the demand front as well as continued global economic turmoil continues to result in a dearth of bullish news.
Despite crude prices having dropped more than $90 in only 4 months, bearish producer strategies remain the focus for hedgers. Those who bought the WTI December 2008 $50 or $80 (even better) puts for next to nothing only a few short months ago have been rolling their profits and protection down to new and cheaper strikes. As highlighted yesterday, the Q109 $30 and $40 puts are trading at prices around only several hundred dollars to be short 1000 barrels from those strike levels.
Even more interesting, consumer hedgers are taking advantage of the prospect of a rebound in late 2009 by buying cheap upside protection in the form of calls and call spreads. The 2nd Half of 2009 $90 call strip has been trading around only $3.50, while the $90/110 call spread in the same tenor also has traded around only $1.50. That's $1,500 of total premium at risk per month to be long every $90/110 call spread in the second half of 2009. These values are reminiscent of the $50 and $80 puts only months ago when crude was trading around $100.
Singapore, 08:00
Despite crude prices having dropped more than $90 in only 4 months, bearish producer strategies remain the focus for hedgers. Those who bought the WTI December 2008 $50 or $80 (even better) puts for next to nothing only a few short months ago have been rolling their profits and protection down to new and cheaper strikes. As highlighted yesterday, the Q109 $30 and $40 puts are trading at prices around only several hundred dollars to be short 1000 barrels from those strike levels.
Even more interesting, consumer hedgers are taking advantage of the prospect of a rebound in late 2009 by buying cheap upside protection in the form of calls and call spreads. The 2nd Half of 2009 $90 call strip has been trading around only $3.50, while the $90/110 call spread in the same tenor also has traded around only $1.50. That's $1,500 of total premium at risk per month to be long every $90/110 call spread in the second half of 2009. These values are reminiscent of the $50 and $80 puts only months ago when crude was trading around $100.
Singapore, 08:00
Tuesday, November 18, 2008
Slow Market Results in Cheaper Option Premiums
Oil markets refused to commit to a direction yesterday as front-month December WTI drifted around the $55 level. With no end in sight for the global economic turmoil, traders continue to focus on the lack of demand heading into 2009. While Opec recently lowered it's forecast yet again for year-on-year demand growth, it is becoming quite evident that demand may actually drop from 2008 to 2009.
The lack of movement in trading yesterday resulted in a sharp drop in implied volatility across the future's curve, resulting in cheaper option premiums. Using American-style options, the Q109 $30 puts are now offered around $0.60; that's $600 of total risk per month to be short from the $30 level in January through March 2009. While $30 may still seem far off, it's important to understand that the underlying futures do not need to trade below $30 for the buyer of this option to profit. Any sharp push lower in the next couple months would result in a spike in the price of the puts- allowing the hedger to sell them out at a profit.
Singapore, 08:30
The lack of movement in trading yesterday resulted in a sharp drop in implied volatility across the future's curve, resulting in cheaper option premiums. Using American-style options, the Q109 $30 puts are now offered around $0.60; that's $600 of total risk per month to be short from the $30 level in January through March 2009. While $30 may still seem far off, it's important to understand that the underlying futures do not need to trade below $30 for the buyer of this option to profit. Any sharp push lower in the next couple months would result in a spike in the price of the puts- allowing the hedger to sell them out at a profit.
Singapore, 08:30
Monday, November 17, 2008
Fundamental view - worth reading
DAVID PARKINSON
Globe and Mail Update
November 14, 2008 at 6:00 AM EST
Don't say Henry Groppe didn't tell you so.
Almost a year ago, when oil prices were humming along at close to $100 (U.S.) a barrel, the 82-year-old dean of oil analysts warned his clients that the price was destined for $60 before the end of the year. When it soared above $145 this summer, he stuck to his guns.
This week, oil fell below $60 a barrel.
It's that kind of prescience that gets guys labelled “guru” – a tag Mr. Groppe long ago earned in his almost six decades predicting the oil market. The soft-spoken Texan cemented his forecasting in the early 1980s, when he foresaw the collapse of oil prices from then-record levels of $40 a barrel.
“Essentially, all forecasting, no matter what's being forecast, is a straight-line extrapolation of what has been experienced very recently,” he said in an interview in Toronto yesterday.
“All of our work is aimed at forecasting changes of direction and discontinuity, because that is the reality of the world. For the last several decades, our forecasts are nearly always this contrast with the consensus.”
Despite his two big (and correct) calls of market downturns, Mr. Groppe is hardly an oil bear. In fact, he hasn't changed his tune much from when we last talked with him two years ago – a time when, ironically, many people felt he was being overly alarmist when he talked about prices being sustainable above $60.
His view is based on a fundamental belief that global oil production has peaked, and is destined to go into a slow but steady decline. At the same time, though, he also believes those higher prices will result in demand destruction as consumers shift to alternative fuels – thus keeping a lid on prices, albeit at higher levels.
“We're in a new era … in which oil production will be irreversibly declining,” he said. “The question then is, what price trend during that period will give you the matching demand destruction?”
“Our conclusion is that, on an average annual basis, [under] normal conditions, it's something that rises slowly from about $65-$70 to about $100. We think that will provide the necessary reduction in consumption.”
He said such a change in consumption is already happening, and not just because of a global economic slowdown. (The Organization for Economic Co-operation and Development yesterday slashed its 2008 and 2009 global demand estimates, citing declining estimates for world economic growth.) Power generators and major industrial consumers have already been switching away from oil and toward cheaper coal and natural gas, and many are in the process of retooling their equipment to lower consumption and shift to cheaper fuels.
While he's skeptical that worldwide vehicular consumption can be significantly reduced over the next 10 years through the use of alternative fuels, he believes fuel substitutions already happening among industrial users will be sufficient to offset the declining global oil production and keep average annual prices in that $70-$100 range.
“That's all been set in motion,” he said, noting that even China – which many forecasters point to as a major driver for continued long-term growth in oil demand – is changing its ways.
“In China, they're rapidly substituting – coal particularly.” Thanks to substitution, he said, “China can continue to grow vehicle population and gasoline/diesel consumption for many years without any increase in total oil consumption.”
Mr. Groppe blames the short-lived record surge in oil prices earlier this year on Saudi Arabia and the OECD's International Energy Agency. He said the Saudis, believing what proved to be an incorrect IEA forecast of a coming surge in non-OPEC oil production, cut its output in late 2006 and early 2007, a move that eventually led to a shortage of supply.
Now, he fears the Saudis may be making the same mistake again – cutting production amid forecasts of a recession-driven slump in demand.
He's forecasting that prices will rebound to average $83-$84 a barrel in 2009, as the current cheaper prices rejuvenate demand while the reduced Saudi production constrains supplies.
And what about oil stocks?
While some analysts point to the sharp decline in the forward strip in oil futures as evidence that oil stock price targets need to be slashed, Mr. Groppe thinks that's looking in the wrong direction.
“The strip has been the poorest forecaster of oil prices of anything that anybody has ever thought of using, yet that's what everybody has been using,” he said. As long as people are driving prices lower based on these forward-strip commodity price assumptions, “It presents the investment opportunity of a lifetime.”
Globe and Mail Update
November 14, 2008 at 6:00 AM EST
Don't say Henry Groppe didn't tell you so.
Almost a year ago, when oil prices were humming along at close to $100 (U.S.) a barrel, the 82-year-old dean of oil analysts warned his clients that the price was destined for $60 before the end of the year. When it soared above $145 this summer, he stuck to his guns.
This week, oil fell below $60 a barrel.
It's that kind of prescience that gets guys labelled “guru” – a tag Mr. Groppe long ago earned in his almost six decades predicting the oil market. The soft-spoken Texan cemented his forecasting in the early 1980s, when he foresaw the collapse of oil prices from then-record levels of $40 a barrel.
“Essentially, all forecasting, no matter what's being forecast, is a straight-line extrapolation of what has been experienced very recently,” he said in an interview in Toronto yesterday.
“All of our work is aimed at forecasting changes of direction and discontinuity, because that is the reality of the world. For the last several decades, our forecasts are nearly always this contrast with the consensus.”
Despite his two big (and correct) calls of market downturns, Mr. Groppe is hardly an oil bear. In fact, he hasn't changed his tune much from when we last talked with him two years ago – a time when, ironically, many people felt he was being overly alarmist when he talked about prices being sustainable above $60.
His view is based on a fundamental belief that global oil production has peaked, and is destined to go into a slow but steady decline. At the same time, though, he also believes those higher prices will result in demand destruction as consumers shift to alternative fuels – thus keeping a lid on prices, albeit at higher levels.
“We're in a new era … in which oil production will be irreversibly declining,” he said. “The question then is, what price trend during that period will give you the matching demand destruction?”
“Our conclusion is that, on an average annual basis, [under] normal conditions, it's something that rises slowly from about $65-$70 to about $100. We think that will provide the necessary reduction in consumption.”
He said such a change in consumption is already happening, and not just because of a global economic slowdown. (The Organization for Economic Co-operation and Development yesterday slashed its 2008 and 2009 global demand estimates, citing declining estimates for world economic growth.) Power generators and major industrial consumers have already been switching away from oil and toward cheaper coal and natural gas, and many are in the process of retooling their equipment to lower consumption and shift to cheaper fuels.
While he's skeptical that worldwide vehicular consumption can be significantly reduced over the next 10 years through the use of alternative fuels, he believes fuel substitutions already happening among industrial users will be sufficient to offset the declining global oil production and keep average annual prices in that $70-$100 range.
“That's all been set in motion,” he said, noting that even China – which many forecasters point to as a major driver for continued long-term growth in oil demand – is changing its ways.
“In China, they're rapidly substituting – coal particularly.” Thanks to substitution, he said, “China can continue to grow vehicle population and gasoline/diesel consumption for many years without any increase in total oil consumption.”
Mr. Groppe blames the short-lived record surge in oil prices earlier this year on Saudi Arabia and the OECD's International Energy Agency. He said the Saudis, believing what proved to be an incorrect IEA forecast of a coming surge in non-OPEC oil production, cut its output in late 2006 and early 2007, a move that eventually led to a shortage of supply.
Now, he fears the Saudis may be making the same mistake again – cutting production amid forecasts of a recession-driven slump in demand.
He's forecasting that prices will rebound to average $83-$84 a barrel in 2009, as the current cheaper prices rejuvenate demand while the reduced Saudi production constrains supplies.
And what about oil stocks?
While some analysts point to the sharp decline in the forward strip in oil futures as evidence that oil stock price targets need to be slashed, Mr. Groppe thinks that's looking in the wrong direction.
“The strip has been the poorest forecaster of oil prices of anything that anybody has ever thought of using, yet that's what everybody has been using,” he said. As long as people are driving prices lower based on these forward-strip commodity price assumptions, “It presents the investment opportunity of a lifetime.”
Sunday, November 16, 2008
Consumer Protection from Opec-Induced Spike
Energy markets pushed to lows not seen since January 2007 last week as the dollar continued its rally amidst the global financial turmoil. Producer hedgers who took advantage of cheap downside puts when crude oil was trading in the $90 range have now begun to roll their positions down to the $30 level. WTI February American-style $30 puts are currently offered as low as $700 per 1000 barrels.
Traders may once again take more notice of Opec, as the cartel has once again called an emergency meeting, this one scheduled for November 29th in Cairo. The group is expected to announce further cuts in production, possibly as much as 1.5-2m barrels per day on top of the 1.5m barrels already announced.
Consumer hedgers looking to protect against an Opec-inspired price spike should look to the WTI December Asian-style $65/85 call spread, currently offered at about $2,250 per 1000 barrels. That's $2,250 of maximum risk with a possible payout of $17,750. The buyer of the call spread would profit on a short-term price spike- thus providing cheap protection against a near-term bounce higher.
Singapore, 16:00
Traders may once again take more notice of Opec, as the cartel has once again called an emergency meeting, this one scheduled for November 29th in Cairo. The group is expected to announce further cuts in production, possibly as much as 1.5-2m barrels per day on top of the 1.5m barrels already announced.
Consumer hedgers looking to protect against an Opec-inspired price spike should look to the WTI December Asian-style $65/85 call spread, currently offered at about $2,250 per 1000 barrels. That's $2,250 of maximum risk with a possible payout of $17,750. The buyer of the call spread would profit on a short-term price spike- thus providing cheap protection against a near-term bounce higher.
Singapore, 16:00
Friday, November 14, 2008
Vol implosion in products
Vols in the front months for products are down significantly. RB Dec down 15 vols to 69, HO dec vol down 8 vols to 57. Crude remains fairly well bid only down 1-2 vols in the front and about .5 in the back.
Volatility is so high that these moves are not that surprising. Directional plays are best served with spreads if the strategy is to hold through expiry. Those trading opportunistically with options have to be careful of swings.
Again, the crude market was largely affected by equity markets. We know demand is softer, and supply reductions are not yet significant enough to send us higher. However, back month crude has strengthened, indicating plenty of buyers for longer dated energy futures.
New York, 345pm.
Volatility is so high that these moves are not that surprising. Directional plays are best served with spreads if the strategy is to hold through expiry. Those trading opportunistically with options have to be careful of swings.
Again, the crude market was largely affected by equity markets. We know demand is softer, and supply reductions are not yet significant enough to send us higher. However, back month crude has strengthened, indicating plenty of buyers for longer dated energy futures.
New York, 345pm.
Thursday, November 13, 2008
HCE - hedge update (Crude Inventory)
Given the strong sell off, volatility remains extremely firm (81.5% in Jan WTI). With this in mind, long put spread strategies or 3-way strategies using a short call are attractive for inventory hedgers.
For those with long physical inventory, consider the 45-55 put spread in Dec WTI (Asian) which is currently valued at $2.60/bbl. This offers good leverage for low up front premium.
For those that can tolerate margin swings, consider the same put spread with a short 69 call for zero cost. This three way position captures the high volatility and offers some downside protection while creating a short position $9 higher than the current market.
For those with long physical inventory, consider the 45-55 put spread in Dec WTI (Asian) which is currently valued at $2.60/bbl. This offers good leverage for low up front premium.
For those that can tolerate margin swings, consider the same put spread with a short 69 call for zero cost. This three way position captures the high volatility and offers some downside protection while creating a short position $9 higher than the current market.
Sunday, November 9, 2008
Near-Term Bearish Momentum
Energy traders continued last week to focus on the global economic slowdown and its effect on consumer demand. Front-month WTI crude oil had declined by almost 10% on the week by the end of trading on Friday despite warnings from the International Energy Agency that long-term global trends in energy supply and consumption were unsustainable. The current (relatively) low crude prices have resulted in alternative energy supplies such as Canada's oil sands and finds off the coast of West Africa to be given lower priorities. State-run oil giants are also being forced to shoulder larger economic burdens, resulting in less re-investing in declining fields. The WTI future's curve serves as a striking reminder of where prices are expected to trade as the economic turmoil dies down. December 2008 is currently trading around $61.00 vs December 2010 trading close to $78.00.
Despite long-term calls for crude oil to push higher, the short-term picture remains fundamentally bearish. To capitalize on the downward momentum, traders and producer hedgers have been using Asian options to buy up cheap near-dated vertical spreads such as the December $50/60 put spread, trading around only $3,400 per 1000bbls. The put spread can be purchased for Zero Cost by selling the December $70 call. This trade puts no premium at risk at or below $70 in WTI crude oil and the December Asian options do not expire until the end of the 2008 calendar year.
Singapore, 23:00
Despite long-term calls for crude oil to push higher, the short-term picture remains fundamentally bearish. To capitalize on the downward momentum, traders and producer hedgers have been using Asian options to buy up cheap near-dated vertical spreads such as the December $50/60 put spread, trading around only $3,400 per 1000bbls. The put spread can be purchased for Zero Cost by selling the December $70 call. This trade puts no premium at risk at or below $70 in WTI crude oil and the December Asian options do not expire until the end of the 2008 calendar year.
Singapore, 23:00
Wednesday, November 5, 2008
Market unable to sustain rally
Whether we call it more of a range bound market or not, we have not been able to sustain a rally. The equity markets Wednesday were bearish following the news of President-elect Obama, and some negative earnings surprises. Energies did not respond well to apparently bullish inventory data, which tends to spell a potential for downside here overnight. However, we see a trading range forming with consumer hedgers increasingly locking in 2009 value when we reach the low 60s. That said, volatility remains remarkably strong overall. The best near term strategy is to roll crude spreads forward, avoiding too much long volatility. We continue to recommend long call spreads or long call 3-way strategies for consumers. Long inventory players would be better to opt for put spreads or longer dated (at least Jan) crude puts that are not subject to too much value erosion over the next week. Note that December American crude options expire on a Monday, which is bad for option owners.
New York 17h20
New York 17h20
Tuesday, November 4, 2008
Cheap Protection Highlighted Against Volatile Markets
Traders yesterday turned their focus to announcements from Saudi Arabia, the world's largest oil producer, that the country would begin cutting production and exports to customers in the US and Europe. Opec is desperate to put a floor in the volatile and declining oil price, hence the large cut, to the tune of about 5%. However, the price jump is seen by many as an opportunity to lock in higher prices as the market continues to trend towards $50. The underlying trend lower is supported by weak demand fundamentals in the current economic turmoil.
The $7 rally in WTI crude yesterday highlights the need for hedging strategies with limited loss potential- the market is too volatile to simply enter the market by selling or buying swaps. Cheap option strategies are available which provide unlimited gains with only limited loss potential. Using Average Price Options, the December $55/70 put spread is currently trading around $5.00. That's $5,000 of maximum loss potential (yesterday's rally would have resulted in more than $7,000 of losses by selling swaps) with a potential payout of $10,000. For unlimited downside protection, producer hedgers can buy the December $60 put for only about $2.80. That's $2,800 of maximum loss potential against unlimited gains should crude oil continue lower in the current economic turmoil.
Singapore, 08:00
The $7 rally in WTI crude yesterday highlights the need for hedging strategies with limited loss potential- the market is too volatile to simply enter the market by selling or buying swaps. Cheap option strategies are available which provide unlimited gains with only limited loss potential. Using Average Price Options, the December $55/70 put spread is currently trading around $5.00. That's $5,000 of maximum loss potential (yesterday's rally would have resulted in more than $7,000 of losses by selling swaps) with a potential payout of $10,000. For unlimited downside protection, producer hedgers can buy the December $60 put for only about $2.80. That's $2,800 of maximum loss potential against unlimited gains should crude oil continue lower in the current economic turmoil.
Singapore, 08:00
Monday, November 3, 2008
Cheap Protection Strategies
Energy markets dropped sharply again yesterday, all but erasing last week's gains. Front-month WTI crude oil sank below the $65 level while Singapore Fuel Oil 180 also gave back gains, losing almost $25 to trade below $280. Implied volatility remains firm in the paper market as hedgers have realized the benefits of buying cheap puts to protect against long swaps and even cheaper calendar call spreads to protect short physical postions.
Naphtha and gasoil prices continue to drop as well, prompting more and more hedgers to enter the market looking for inexpensive producer strategies. NYMEX will within a few weeks list Fuel Oil options contracts on their Clearport clearing system, but until that time, cheap, short-term strategies are available using highly liquid WTI options. Using Average Price Options (Asians), the WTI December 2008 $40/55 put spread is currently trading at only $2.00. That's $2,000 of total premium at risk with $13,000 of profit potential. Fuel Oil consumer hedgers looking for an entry point to buy the 180 or 380 Swaps may want to consider buying the above put spread to protect against downside losses.
Singapore, 08:00
Naphtha and gasoil prices continue to drop as well, prompting more and more hedgers to enter the market looking for inexpensive producer strategies. NYMEX will within a few weeks list Fuel Oil options contracts on their Clearport clearing system, but until that time, cheap, short-term strategies are available using highly liquid WTI options. Using Average Price Options (Asians), the WTI December 2008 $40/55 put spread is currently trading at only $2.00. That's $2,000 of total premium at risk with $13,000 of profit potential. Fuel Oil consumer hedgers looking for an entry point to buy the 180 or 380 Swaps may want to consider buying the above put spread to protect against downside losses.
Singapore, 08:00
Sunday, November 2, 2008
Volatile October Comes to a Close
Trading in the volatile month of October came to a close on Friday as new evidence continues to emerge pointing to recessionary conditions in many western nations. The Bank of Japan followed the lead of central banks around the world with its own 20 basis point cut in the borrowing rate, reducing that country's overnight rate to only 0.3%. WTI crude oil continued to pull back from the $70 level as the continuing economic turmoil leads many traders to position themselves for further moves lower in what remains of calendar year 2008.
Producer hedgers continue to look for cheap downside strategies. Using Average Price Options (Asians), the WTI December 2008 $60 puts are trading around only $3.25. That's $3,250 of total premium at risk to be short from the $60 level for the next 60 days. This simple strategy allows unlimited downside protection without the margin calls and volatile daily swings of trading flat price. The long put can be made costless (meaning the hedger need only post margin) by selling the December $80 call. This trade puts zero premium at risk at or below $80.
Singapore, 12:47
Producer hedgers continue to look for cheap downside strategies. Using Average Price Options (Asians), the WTI December 2008 $60 puts are trading around only $3.25. That's $3,250 of total premium at risk to be short from the $60 level for the next 60 days. This simple strategy allows unlimited downside protection without the margin calls and volatile daily swings of trading flat price. The long put can be made costless (meaning the hedger need only post margin) by selling the December $80 call. This trade puts zero premium at risk at or below $80.
Singapore, 12:47
Subscribe to:
Posts (Atom)
Posts
