Energy prices experienced a day of respite after Kurdish militants damaged a key crude pipeline in eastern Turkey. While the pipeline is substantial and can handle up to 1m barrels a day, the incident serves to highlight upside issues in the supply/demand spectrum that may be overlooked at the moment. World inventory levels remain at discouragingly low levels and Opec spare capacity, as well as that of non-Opec producers, continues to decrease. Until these issues are resolved, the threat of oil prices returning to levels above $130 will remain with us on a day-to-day basis.
With this in mind, hedgers may want to lock in at least 50% of their 2009 fuel needs using inexpensive option strategies. $20 of upside protection is available for Zero Premium by purchasing the $130 / 150 call spread strip for every month in calendar year 2009. The price of owning the call spreads is offset by selling every $88.50 put in 2009.
Thursday, August 7, 2008
Take advantage of easing volatility
New York, 5pm Thursday Aug 7, 2008
The market tested lows below $118 today but rejected a breakdown, ending up over $120. Technical analysis pointed to reversals in most products and volatility was being reduced by traders. We expect to see stronger RB cracks in the coming days while heat cracks have likely seen the majority of their sell off. However, we are not taking any positive bias yet with the heat crack.
This market favors buying options coming into the weekend. Fridays often provide buying opportunities as traders reduce positions fearing the cost of decay. Those looking to take a long position should look at the well offered September American $130 call offered 60 cents/bbl. This only has 1 week to expiry but provides insurance against an Olympics "event". Furthermore, we are in hurricane season now and the next two weeks may provide some interesting data. For those hedging hurricane risk, buy RB calls. A September $3.20/gal RB call is offered at $0.065/gal, providing good insurance in the event of refinery issues.
The Olympics provide an odd sense of peace in the world for the moment. Bush will be in attendance with some 70 other heads of state in Beijing.
The market tested lows below $118 today but rejected a breakdown, ending up over $120. Technical analysis pointed to reversals in most products and volatility was being reduced by traders. We expect to see stronger RB cracks in the coming days while heat cracks have likely seen the majority of their sell off. However, we are not taking any positive bias yet with the heat crack.
This market favors buying options coming into the weekend. Fridays often provide buying opportunities as traders reduce positions fearing the cost of decay. Those looking to take a long position should look at the well offered September American $130 call offered 60 cents/bbl. This only has 1 week to expiry but provides insurance against an Olympics "event". Furthermore, we are in hurricane season now and the next two weeks may provide some interesting data. For those hedging hurricane risk, buy RB calls. A September $3.20/gal RB call is offered at $0.065/gal, providing good insurance in the event of refinery issues.
The Olympics provide an odd sense of peace in the world for the moment. Bush will be in attendance with some 70 other heads of state in Beijing.
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