Consumer Hedges in Focus after Bullish Data Release

Energy markets rallied yesterday following bullish U.S. inventory data showing a decline in crude stocks of 400,000 barrels. The surprise drop is indicative of the impact of hurricanes in the fragile Gulf region, as much of the blame for the declining stocks is placed on tropical storm Edouard for disrupting imports. US refiners have also been producing less product as their margins continue to shrink; maintenance programs are expected to continue well into autumn of this year. The end result was a rally of more than $4 in front-month WTI crude.

Upside consumer hedge strategies continue to remain cheap, as hedge funds and short-term traders focus on the 200-day moving average lurking on the downside. Protection from further moves higher can be found in the January through June $130 / 140 call spread for $2.40. For an average price of only $2,400 per month, this trade pays $7,600 of upside protection. The hedge can be mated with the $83 put to make the entire trade zero cost, thus providing $10,000 of upside protection.

Bullish gasoline stats/weather push market higher

A surprise gasoline draw helped push the market higher today, yet product cracks were not overly bullish. Crude was up as high as $117.46 by midday and those who took advantage of low cost options strategies and short covers rejoiced. There is some model information pointing to weather risk coming out in the next week or two, which contributed to the NG rally that subsided late in the day (NG up only 15 cents). This weather may also affect crude supply, so be advised.

Call strategies still remain our recommendation for hedgers that remain low on inventory. The September American/Euro style crude options will expire next Wednesday, so look to the September Asian or October American/Euro for near term hedges. Volatility is still firm.

Longer term, the Q4 120-140 Asian WTI call spread is offered at $4.00. This still looks like a good buying opportunity.

NY: CT (3PM EST)