U.S. Inventory Data Produces Increased Volatility

Energy prices showed marked volatility yesterday as a result of surprising U.S. inventory numbers. Crude stocks saw a build of 9.4m barrels last week, largely as a result of swelling imports. Converesly, petrol inventories provided an equal surprise on the downside, showing a draw of 6.2m barrels, marking the second week in a row of +6m draws. This can be blamed on both a weak refinery margin, where refiners will often choose to forego further production in favour of much-needed maintenance programmes, as well as disruptions caused by the previous tropical storm, Edouard.

Volatility often results in hedgers backing away from the market for fear of incurring added risks to their balance sheet. In fact, a volatile market is just the scenario for choosing options as a proper hedge over futures or swaps. Options provide cheaper protection as well as limited loss, allowing the prudent hedger to concentrate on their actual business and not worry about basis or downside hedging risk. Just such a consumer hedge would be buying the January through December 2009 $130 / 150 call spread for Zero Cost by selling the $105 / 93 put spread in the same tenour. This trade provides $20 of upside protection for every month in 2009 while having only limited risk, from the $105 level down to the $93 strike ($20 of free protection in exchange for $12 of max risk).

AP Story featuring HCEnergy

AP
Oil prices rise ahead of inventory report
Wednesday August 20, 9:41 am ET
By Pablo Gorondi, Associated Press Writer

Oil prices rise as investors look to inventory report for signals on US demand

Oil prices rose above $116 a barrel Wednesday as investors awaited a weekly crude inventory report which was predicted to show a drop in U.S. gasoline stocks.

By the afternoon in Europe, light, sweet crude for September delivery was up $1.55 to $116.08 a barrel in electronic trading on the New York Mercantile Exchange. Earlier in the session, it traded as low as $114.26 before rebounding. The contract rose $1.66 to settle at $114.53 a barrel on Tuesday.

Investors are waiting for a report later Wednesday by the U.S. Energy Department's Energy Information Administration on U.S. oil stocks for the week ended Aug. 15. The petroleum supply report was expected to show that gasoline inventories fell by 3 million barrels, according to the average of analysts' estimates in a survey by energy information provider Platts.

"People are going to be looking at the (gasoline) numbers," said Jonathan Kornafel, Asia director for brokerage Hudson Capital Energy in Singapore.

The Platts survey also showed that analysts projected oil stocks rose 1.7 million barrels and distillates went up 1.2 million barrels during last week.

Tropical Storm Fay -- which contributed to higher oil prices over the past few days -- moved inland in the United States on Tuesday, bypassing oil and gas platforms in the Gulf of Mexico.

Energy markets, however, were still nervous, as some computer models showed Fay possibly becoming a "boomerang storm" and moving back toward the Gulf, said Olivier Jakob of Petromatrix in Switzerland.

JBC Energy in Vienna, Austria, also mentioned "hurricane risk" as one of several factors supporting oil prices.

Tuesday's comments from Venezuelan Oil Minister Rafael Ramirez about a possible proposal at the September OPEC meeting to cut output if prices continue to fall lent support to prices.

Oil prices have rebounded after falling about $35, or nearly a 25 percent, from their trading record of $147.27 on July 11 on expectations that high gasoline prices and slowing economic growth in the U.S., Europe and Japan will undermine global energy demand.

"Just as the market overshot to the upside, it overshot the other way," Kornafel said. "It looks like we're consolidating between $112 and $118."

Weighing on oil prices was a slightly stronger dollar. The 15-nation euro traded was down to $1.4721, while the dollar rose near 110 Japanese yen. A rising dollar encourages investors who had been seeking commodities like oil as a hedge against inflation to sell their positions.

"I think credit markets need to improve in the U.S. before we see a sustained rally in the dollar," Kornafel said. "We may have hit a top for the dollar. I don't think this rally can last."

In other Nymex trading, heating oil futures rose 4.44 cents to $3.1681 a gallon, while gasoline prices added 4.11 cents to $2.9050 a gallon. Natural gas futures increased 16.1 cents to $8.137 per 1,000 cubic feet.

In London, October Brent crude gained 91 cents to US$114.96 a barrel on the ICE Futures exchange.

Associated Press writer Alex Kennedy in Singapore contributed to this report.