Opec Statements, US Inventory Data result in Opaque Outlook

Crude oil briefly traded into positive territory yesterday shortly after coordinated world-wide interest rate cuts were announced. However, the slashing of borrowing rates was not enough to sustain the market as further demand destruction data as well as bearish US inventory numbers caused traders to push the market lower once again. Petrol demand continues to weaken in the western world while US crude stocks showed a remarkable build last week of 8.1m barrels on the back of increasing imports as well as weak refinery demand. Traders are also keeping an eye on Opec, which appears to be flirting with the idea of an emergency meeting in November to drop output for the second time in only 3 months. Several members of the cartel, including Iran, have pointed to data indicating the world is oversupplied by as much as 400,000 barrels per day.

Bearish and potentially bullish news continue to keep implied volatility levels inflated in crude oil options trading. The VIX (volatility index) also is trading at inflated levels- traders watch the vol levels of both markets in tandem, as they often support each other. Regardless, the high premium levels are expected to continue, thus resulting in traders moving to profit from downside moves by buying cheap put spreads such as the November 2008 through March 2009 $85/70 put spread strip. With a maximum loss potential of only $5,300 per month, this trade provides a total of $48,500 of downside protection through the first quarter of 2009.

Singapore, 08:30

Crude and gasoline builds

Statistics revealed gasoline demand destruction and significant crude inventory builds. However, crude did not decline as much as expected. Consumer hedgers for diesel and jet fuel are starting to buy upside insurance now for 2009, which has given support to heating oil markets. Gasoline demand has forced the RB cracks to the negative territory, creating opportunities to buy cracks for 2009 at very depressed levels.

With volatility remaining at very high levels, using spreads (collars) or 3-way structures is very attractive. A November through December 95-105 call spread (Asian) is zero cost selling a 77 put. This hedge would be good for those that are holding low or no inventory against short sales for Nov and Dec.