U.S. oil inventory data showed a rise in crude stocks last week, reinforcing the current bearish trend. WTI front month crude came close to touching the $117 level before bouncing back above $118.50. The slow entry into the market by downside hedgers has been somewhat offset by Tuesday's purchase of December 2008 $100 puts by a Latin American producer. Sellers of the downside protection must sell futures to protect against their short put position, thus adding to the current bearish sentiment.
A popular trade continues to be buying the December 2008 $100 put for around $4.00. This trade provides unlimited downside protection below $100 until November 17th, when the option expires. Longer-term downside protection can be owned by purchasing the December 2008 through March 2009 $100 / 80 put spread strip, also for $4.00. For the same price per month for just the December 2008 $100 put, a hedger can buy every $100 put from December 2008 through March 2009 by selling every $80 put for the same months. This trade provides $16,000 of downside protection per month with max loss of only $4,000. For the hedger that expects a further downside push sometime in the next 6 months, this trade should fit perfectly.
Wednesday, August 6, 2008
Statistics out, range in
DOE +1.6 CL RB -4.3 HO +2.8
API CL -2.5, RB -1.8, HO +3.1
After API data was released early, crude rallied until DOEs put a damper on things and the day remained range bound. RB was the only ray of hope on the bullish side with draws against a backdrop perception of falling demand. Heat cracks came in further today down to $17.25 /bbl referencing September futures. This level is back to a range that should be more appealing to consumer hedgers. However, the heating oil distribution industry and diesel market seems to be slow to take advantage of this opportunity, awaiting even lower prices. There has not been significant put activity to suggest a great fear of a quick move lower.
Hedgers needing inventory protection are wise to look at out-of-the-money puts that are reasonably valued by the market.
As a footnote, financial markets continued the rally launched Tuesday. Energy equities suggest the Monday selloff was an overreaction to weakening crude prices. Additionally, the USD continues to strengthen against major currencies.
API CL -2.5, RB -1.8, HO +3.1
After API data was released early, crude rallied until DOEs put a damper on things and the day remained range bound. RB was the only ray of hope on the bullish side with draws against a backdrop perception of falling demand. Heat cracks came in further today down to $17.25 /bbl referencing September futures. This level is back to a range that should be more appealing to consumer hedgers. However, the heating oil distribution industry and diesel market seems to be slow to take advantage of this opportunity, awaiting even lower prices. There has not been significant put activity to suggest a great fear of a quick move lower.
Hedgers needing inventory protection are wise to look at out-of-the-money puts that are reasonably valued by the market.
As a footnote, financial markets continued the rally launched Tuesday. Energy equities suggest the Monday selloff was an overreaction to weakening crude prices. Additionally, the USD continues to strengthen against major currencies.
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