Consumer Hedge Tear Sheet: Dec 17

Consumer Hedge Tear Sheet: Dec 10

HCEnergy produces a Consumer Hedge Tear Sheet which is distributed 2-3 times per week to our clients. Please contact info@hudsoncapitalgroup.com if you would like to be added to the e-mail distribution list.

Consumer Hedge Tear Sheet: Nov 23

Trader's Commentary

While demand remains lackluster downstream, crude markets remain firm around the $80 mark despite rising inventories in WTI. Implied volatility has dropped in line. Recall there is incentive to increase inventories in Oklahoma for year end tax purposes, so beware the builds in Cushing. Physical markets in refined products have not been helped by warmer weather and a slow economic recovery. It is also notable that NG suffered a 27 cent down day based on reversing weather calls from yesterday.

Heating oil traders and suppliers taking on inventory with low demand may look to hedge with collars or put spreads in this market. The Dec-March calendar heating oil swap is priced at $2.12 per gallon.

180 – 200 put spread is now 6 cents or sell the 230 call.

Zero cost collar (hedger buys put) is 200 put versus 220 call.

Please call for further detail.

Platts: Singapore Airlines strips down fuel hedge

Singapore Airlines strips down fuel hedge
Carrier takes gamble on prices holding steady for next 6 months

Singapore—Singapore Airlines has overhauled and stripped down its jet fuel hedging policy to leave itself deliberately more exposed in the jet fuel market, in a gamble that actual fuel prices will hold steady for the next six months, senior company executives told analysts in Singapore this week.

The airline, which is well known for running one of the most transparent hedging programs in the world, has dramatically scaled back from a position that in recent years covered as much as 60% of the jet fuel it consumes. Singapore Airlines currently holds 3.52 million barrels of jet fuel hedges at an average price of $100/barrel out until March 2010. The hedges are enough to cover 22% of the 16 million barrels the airline expects to consume in the six months up to then. The position is well below the minimum

30% protection Singapore Airlines once required. Chief Executive Officer Chew Choon Seng said the board of Singapore Airlines had pushed back on taking bigger hedges after the extreme volatility in fuel prices of the past year.

“We—when I say we I mean not just the management but the board committee that oversees our hedging activities—had to review the policy in the light of the substantial losses that were incurred when oil and fuel took a precipitous drop,” said Chew. “The magnitude of the volatility forced us to re-examine the wisdom of adhering to the previously laid-down policy. And I suppose our counter-parties in hedging did the same too, because their pricing on hedging instruments corrected very sharply.”

Chew’s comments suggest that the premiums charged for call options close to prevailing market values have simply become too expensive for the airline, especially since it has sworn off the very risky strategy of covering some of those costs through the sale of put options to other companies. Singapore Airlines has steered away from taking outright positions in the swaps markets, or dealing in risky collar option structures. It has opted instead for straightforward call options, which can be costly when volatility is high.

Call options give holders the right to buy protection in the shape of cheaply priced derivatives after a major market rally. They are usually bought with strike prices above prevailing levels, as an insurance policy against a spike.

“I suppose it reflects the underlying volatility,” Chew said of the increasingly expensive call options on offer. “And as a result of which the prices that we were getting on the market were not worth the risks that were being covered, and hence we decided to trim the level of our exposure.”

A massive loss from its hedges in the last six months forced the airline to take a step back from hedging in general. The Singapore Airlines group as a whole lost almost half a billion Singapore dollars in the six months ended September 30. The parent company lost S$400 million ($289 million) from its hedges, while its cargo company lost another S$70 million, and its budget airline SilkAir lost a further S$16 million.

Much of those losses would have been offset by lower fuel bills in the physical jet fuel market. Jet fuel costs have made up 36% of Singapore Airlines’ expenses so far this financial year, and the company’s decision to turn its back on its previous, well-defined hedging strategy prompted questions from analysts— particularly about its assumption that jet fuel prices should hold steady for some time to come.

“I appreciate that you do believe that fuel prices will stay at the current levels, but obviously a hedging strategy is to hedge against the risk that we’re wrong, so why have you taken a slightly different approach than you’ve taken previously,” asked HSBC bank analyst Mark Webb. Chew defended Singapore Airlines’ decision to effectively take the risk that oil prices will not rise much from current levels. “The fact of the matter is that the fundamentals of the global economy are not that rosy, but markets seem to be riding ahead on high liquidity. Whether that’s sustainable remains to be seen,” he said. Chew added that the airline noted with interest that Saudi Arabia in particular was hoping to maintain oil prices at current levels, and avoid any further gains.

“But at the end of the day markets have minds of their own, and so...you place your money and you take your pick,” Chew acknowledged. The company has cut hedges to minimal levels in a bid to slash reported derivatives losses on its books by the end of the year. At current prices, its remaining hedges would generate a S$50 million loss in the next six months, much less than the red ink it suffered in the last six months. The decision could ultimately be looked on by shareholders with hindsight as wise or foolish. Singapore Airlines acknowledged that a big rally in oil prices would now be worse for business than usual.
“Of course, if jet fuel prices go above $100 or go near $100, then hedging losses will be less. But conversely, our fuel expenditure will go up, and we certainly hope that will not be the case, because being hedged only 22%, it leaves 78% naked,” said Chew. Physical jet fuel prices closed in Singapore November 12 at $85.22/barrel, down 37 cents/b on the day but up $2.44/b since the start of the month.—Dave Ernsberger

Senate Committee on Banking: Discussion Draft of Financial Regulatory Reform

Senator Dodd (D-Conn) and 8 other Democratic members of the Senate Committee on Banking released an approximately 1,200 page draft proposal for financial regulatory reform yesterday.

All commodity swaps and options subject to US law are required to be submitted for clearing, with two exceptions:

1. No clearing organization will accept the swap or option for clearing
2. One of the parties to a trade is not a swap dealer or major swap participant AND is ineligible to use a clearing organization

A clause of the proposal addresses concerns that swaps or options could be customized to avoid clearing. The regulators would be authorized to adopt rules regarding attempts to evade the mandatory clearing requirement.

A discussion draft summary is available at http://banking.senate.gov/public/_files/FinancialReformDiscussionDraft111009.pdf while the full discussion draft text is available at http://banking.senate.gov/public/_files/AYO09D44_xml.pdf.

Consumer Hedge Tear Sheet: Nov 12

Consumer Hedge Tear Sheet: Nov 9

Consumer Hedge Tear Sheet: Nov 5

Asia Hedging Strategies & Pricing: Nov 4

Asia Refining Hedge Sheet: Nov 3

Energy Market Indications & Imp Vols: Nov 2

Asia Refining Hedge Sheet: Oct 27

Energy Market Indications & Imp Vols:Oct 26

CFTC Chairman Gensler's remarks to the Natural Gas Roundtable Luncheon

CFTC Chairman Gary Gensler delivered remarks at the Natural Gas Roundtable Luncheon earlier today. He summarized the current regulatory reform proposals pending in the U.S. House of Representatives by saying the following:

Both of the committees’ bills include three important elements of regulatory reform: First, they require swap dealers and major swap participants to register and come under comprehensive regulation. This includes capital standards, margin requirements, business conduct standards and recordkeeping and reporting requirements. Second, the bills require that dealers and major swap participants bring their clearable swaps into central clearinghouses. Third, they require dealers and major swap participants to use transparent trading venues for their clearable swaps and provide the CFTC with authority to impose position limits in the OTC derivatives markets.

The full text of his remarks is available at: http://www.cftc.gov/ucm/groups/public/@newsroom/documents/speechandtestimony/opagensler-16.pdf

Consumer Hedge Tear Sheet: Oct 21

Asia Hedging Strategies & Pricing: Oct 21

Asia Refining Hedge Sheet: Oct 20

Energy Market Indications & Imp Vols:Oct 19

Market Commentary

Energies finished on the highs this week, following a week of bullish stats and a weakening USD. Refinery runs were particularly bullish for products with surprise RB draw of 5.1 MN bbls and a 4% decrease in capacity utilization. We note however that distillate inventories remain at decade highs and global mid distillate inventories remain high across the board. This likely keeps refining margins under pressure for some time to come.

The other big story of the week was the falling volatility in crude options. In a rising market, we often see volatility decrease. This was not the case last week when it was rumored that a larger player was buying longer-dated positions and keeping the options market firm. In the absence of this buyer, volatility trimmed 7% this week with a slight increase to the call skew. With this in mind, we suggest that short hedgers buy puts as an alternative to short futures strategies.

Examples: November WTI Asian $75.00 put is $2.00, OR consider the costless $75.00 put vs the $82.50 Call as a collar.

Natural gas note: Fundamentals remain bearish despite some near term cold. The Friday rally was another reminder of the unpredictability of the NG market. Despite the rally, the Nov-Dec spread went out to -$0.936, a bearish indication.

Consumer Hedge Tear Sheet: Oct 15

Hudson Capital Energy: Asia Hedging Strategies & Pricing Oct 14

Consumer Hedge Tear Sheet: Oct 13

Asia Refining Hedge Sheet: Oct 13

Energy Market Indications & Imp Vols:Oct 12

Effect of Columbus Day bank holiday on U.S. Energy Markets

Due to the Columbus Day bank holiday API statistics will be released on Wednesday, October 14th (4:30 PM EDT) while DOE statistics for petroleum and natural gas will be released on Thursday, October 15th (10:30 AM EDT for natural gas, 11:00 AM EDT for petroleum). NYMEX markets are operating normally today.

Consumer Hedge Tear Sheet: Oct 8

Asia Hedging Strategies & Pricing: Oct 7

Asia Refining Hedge Sheet: Oct 6

Energy Market Indications % Implied Vols: Oct 5

Market Update: End of Third Quarter

DOE Inventory Statistics (in millions of barrels): Crude +2.8, Distillate +0.3, Gasoline -1.6, Refinery utilization -1.0%, Cushing -1.6

A big rally today in crude followed statistics that were in-line with expectations, aside from refined products which had smaller-than-expected builds. Heat and RB cracks seem to have hit some key support levels where economics are thin for refiners collectively in the US. Consequently, crack spreads improved by $0.50/bbl. Technical analysts saw key levels broken in crude which drove it much higher than we expected. The average investors/funds were neutral but we believe index investors needed to increase positions going into Q3.

At this point, we again caution against short swaps or short futures positions even though we would be looking for a pull back Thursday and Friday. Otherwise, short futures with a call stop loss strategy. The December $80 call is worth $1.60/bbl. That does not look too expensive against the backdrop of a weak USD and Iran risk.

For those covering inventory, the October $62-67 Asian crude put spread works nicely for $1/bbl. If you have room to sell upside, use the $73.5 call to create a zero cost 3-way.

Regarding regulatory reform efforts, the SEC and CFTC are jointly reviewing how to harmonize their approaches to market regulation and are expected to publish a report on October 15th. One of the points that will be studied is "National market and common clearing versus separate markets and exchange-directed clearing."

Sources: EIA (http://www.eia.doe.gov/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/wpsr.html), SEC (http://www.sec.gov/news/press/2009/2009-211.htm)

Distillate Fuel inventories in the U.S. continue to climb

The U.S. Energy Information Agency weekly statistics published yesterday morning included an unexpected 3 million barrel increase in U.S. distillate fuel inventories, pushing NYMEX Heating Oil futures down $0.05 for October and November 2009 delivery.

(Source: U.S. EIA, http://tonto.eia.doe.gov/dnav/pet/hist/wdistus1w.htm)

Markets Update, Singapore Fuel Oil 180cst Hedging and Trading

It was no surprise to see crude prices rebound yesterday, following the pattern of the last few months of a tightening, range bound market. The major western crude benchmarks are increasingly squeezing the $70 price point while Singapore Fuel Oil prices ping back and forth between $410 and $450.

Most analysts point to the weak US Dollar which yesterday fell short of key resistance levels vs a basket of major currencies. We feel that so long as global economic data continues to trend positive, the Dollar will experience further selling pressure which will not necessarily impact crude prices to the same extend as we’ve seen since mid-March. Rather, the overwhelming excess supply (Saudi Arabia’s spare capacity, OPEC member and non-member flooding of the market) paired with weak global demand (excess refining capacity, weak industrial demand- China’s oil imports fell in August while diesel demand is dragging behind the country’s economic growth) will continue in the short-term to keep a lid on prices despite Dollar weakness.

Last week’s trade recommendation continues to work well- in effect if Oct09 and Nov09 Singapore FO 180cst settle below $450, the trader is rewarded with a free Dec09 $450 call. Given the market’s range bound trading as of late, this trade continues to be popular. It remains possible to put this trade on for Zero Premium (no premium at risk below $450 in Oct or Nov), but with October expiration fast approaching, the door for this trade is fast closing (which in this case implies its effectiveness and profitability is only increasing).

Singapore

Consumer Hedge Tear Sheet: 09-17-2009

Markets Update, Singapore Fuel Oil 180cst Hedging and Trading

Investor risk appetite pushed the major crude benchmarks back above/towards $70 while exerting downward pressure on the US Dollar. With the greenback now trading at levels not seen for a full year, many would expect to see crude prices continue pushing higher. This has not been the case however, as seasonal downturns in Western oil demand will continue to exert negative pressure for the next several months.

Several bullish items were the focal point of traders’ discussions on the Floor yesterday. OPEC raised its global oil demand forecasts for 2010 while amending higher the current year’s expected demand by 0.14M b/d. Meanwhile, US Fed Chairman Ben Bernanke was quoted as saying the US recession “is very likely over”. However it is important to pair this info with data showing enormous excess global spare capacity. A recent article by Simon Parry titled “Revealed: The Ghost Fleet of the Recession” making the rounds amongst traders has also resulted in much debate. The article is well worth reading and can be found by searching the title on Google.

Many traders expect neutral to weak price action through mid-Nov followed by a year-end push higher (due to the (foolish?) expectation of increased global demand eating into excess crude and product stocks). Traders can use simple option structures to protect against a December surge in prices while posting zero premium (no premium at risk below certain price levels). For example, using Singapore Fuel Oil 180cst, traders can sell the October and November $450/500 call spreads and use that premium received to pay for the December $450 call. This trade contains no risk if Oct and Nov settle below $450 and has maximum upside exposure of $50 per month in Oct and Nov. Similarly, if Oct and Nov expire below $450, the trader has just received a free December $450 call with unlimited upside reward potential.

Singapore

Weak petroleum demand / Bullish markets

We note the API inventory data is again showing a large build in distillates (5.2 MN bbls).

Weak demand fundamentals in the US and Europe have driven petroleum cracks down to 12 month lows, forcing refiners to examine operating rates and length of planned turnarounds. High inventories have to be corrected at some point. Unless home heating demand is above average, we will need to see demand pick up in the rail, road diesel, aviation or maritime sectors to see a rebound in crack levels. Meantime, there is an opportunity to use NY heating oil or European gasoil options to hedge upside petroleum exposure in both crude and refining cracks.

Using the NY Heating Oil options (Asian) for a consumer hedge, the Q1 $2.00-2.50 call spread is offered at $0.1250/gallon. Adding a sale of the $1.70 put creates a structured 3-way option strategy for "zero" premium cost.

Please email or call to be added to the consumer hedge tear sheet blast.

New York, Sept 15.

September Bearish Pressure; Singapore Fuel Oil 180cst

The long-expected correction in crude and equity markets (can anyone tell the difference between the two these days?) appears to have begun this week. This despite relatively positive economic data permeating from across the globe- most recently positive ISM manufacturing data released in the US. The issue appears to be too much of a run-up too fast, as the pressure from a historically weak September and October bears down on investors and traders.

Much of the current fear from traders this week can be traced to indications from the Chinese government of a curb in bank lending. On the surface, this can be expected to result in lower energy demand across the board and in the words of Australian Treasurer Wayne Swan, a potential “knee-capping” of the economic recovery seen since March.

If bearish sentiment continues, expect to see a potential break below support levels in WTI around $67.35. Further declines in shipping rates due to reduced Chinese demand can be expected to continue, as reported in a Bloomberg survey earlier in the week highlighting expectations for a 50% drop in freight rates in the next 4 months.

Despite the approximately 10% rise in bunker prices last month and strong price support exhibited recently at ports globally (relative to WTI & Brent), inventory holders worried about short-term protection should not take bunker price strength for granted. A $420 price floor in October Singapore Fuel Oil 180cst can be locked-in for zero cost by accepting a price ceiling in the same month around $445. Similarly, suppliers holding inventory may wish to simply sell an upside price ceiling around the $480 level for around $15/MT. This type of hedge gives $15 of downside price protection while ensuring a payment of at most $15/MT upon an October expiration below $495.

Singapore, 08:00

Return to the $70 Pivot, Bunker Hedging Strategies

The $70 pivot in WTI crude proved too much of a magnet for the bears yesterday, as the October crude benchmark now stands firmly above $71. Dollar weakness on the back of encouraging European and Japanese economic data pushed equities and thus the asset class that we now know as crude oil higher. Nevertheless, the short-term focus remains on the US EIA data and whether or not the API’s shocking inventory draws will be matched.

The strong rally in Fuel Oil prices can be expected to continue for the foreseeable future as refinery run cuts and relatively strong bunker demand look to persist. By accepting a leveraged price floor in Singapore Fuel Oil 180cst at $380 (more than $50 below current levels), bunker consumers can gain a Zero Cost price ceiling at $450 (less than $20 above current levels) for the entirety of Q409. Similarly, by utilizing a limited price ceiling (protection from $450 to $500) consumers willing to accept the leveraged price floor at $380 can actually receive approximately $20/MT of premium reimbursements each month of Q409 so long as Sing FO 180cst settles above $380.

Singapore

Crude Markets Retrench; Singapore Fuel Oil 180cst Hedging

A stronger US Dollar finally brought the crude markets lower yesterday, pulling WTI crude below the psychological $70 support level and outside of its recent $70-72 trading range. Despite the wide gap between WTI and Brent (just under -$3.00), the spread between the two major benchmarks remained mostly unchanged during yesterday’s fall. For those watching the price of crude on a day to day basis, the US Dollar and equities (investor sentiment) remain the chief catalysts for moving the market.

Traders should remain wary of recently surfacing short-term bearish sentiment in crude markets (not only from investor sentiment but also as a result of the latest negative comments emanating from OPEC re oversupply of refined products and subsequent effects on feedstock demand). Plenty of time still remains in the Atlantic hurricane season and meteorologists are closely watching a storm cluster recently formed off the coast of West Africa. Given past encounters between oil producers/refiners and hurricanes in the Gulf of Mexico, ignoring the possibility of a price spike in the next few months can certainly prove costly.

Much to the chagrin of shipping companies around the world, bunker fuel prices remain firm despite recent weakness in major Western benchmarks. Therefore consumer hedging remains a major factor in controlling one’s fuel costs. Establishing a price ceiling in Q409 through 1H10 in Singapore Fuel Oil 180cst at $450 for Zero Cost is possible by accepting a leveraged price floor in the same tenor at around $380. Similarly, for those seeking a non-leveraged position, the $450/550 call spread in each of the 9 months beginning with Oct09 can be owned for Zero Cost by accepting a price floor around $390 in the same tenor. This hedge provides $100 of consumer protection per month in Q409 through 1H10 with no hedging losses at or above $390.

Singapore

Consumer Hedge Tear Sheet: 08-10-2009

Record levels of U.S. distillate fuel exports

The U.S. Energy Information Agency reports that monthly U.S. exports of distillate fuel are at record levels, driven partially by unusually high U.S. distillate fuel inventories.

EIA: Weekly U.S. Total Distillate Stocks

Oil Continues Higher, Singapore Fuel Oil 180cst Hedging

Energy markets took a breather yesterday during what appears to be a relentless march higher. Months, if not several quarters ahead of any significant return to demand, the current rally in the major crude benchmarks WTI and Brent has everything to do with a renewed demand for relatively riskier assets. This translates to day-to-day trading activity focusing almost exclusively on broader investment trends. The United States EIA inventory numbers due out tonight are expected to take a somewhat neutral tone, thus any surprise draws would give further impetus to the underlying rally, while builds may simply continue to be ignored.

Consumer hedgers (of any product) may wish to keep an eye on both WTI and Brent as the $75 level looks to be broken shortly. Twice we have bounced off this number in recent months as fears of the high price of crude derailing any nascent recovery begin to take hold.

Bunker prices continue to march higher on the back of increasing demand and refinery cuts, thus adding significant pain to shipping companies across the globe. Hedging strategies which utilize only swaps work best when a market simply moves in one direction. As the Western benchmarks approach $75 and another pull-back becomes possible, consumer hedgers can use options to take advantage of price swings lower while maintaining some measure of protection on the upside. The Singapore Fuel Oil 180cst Q409 $450/mt price ceiling (call option) can be owned for zero premium by accepting a price floor around $425. In order to reap the benefits of a possible (but not wholly likely) downward move in fuel prices in the final quarter of the year, hedgers can own the $450/500 call spread for zero premium by accepting a price floor at $375. This trade allows consumers to enjoy a healthy price drop of more than $60 before hedging losses begin while also providing $50 of protection per month above $450.

Singapore

Singapore Fuel Oil Remains Firm

Energy markets began to pull back on Tuesday as traders question the legitimacy of the recent commodity/equity rally. The US Dollar certainly looks oversold at this stage and it wouldn’t be surprising to see a greenback rally force crude prices lower through the month of August. Yesterday’s trading in the western benchmark crudes displayed significant technical weakness while demand for black gold is expected to remain weak throughout the third quarter. However, there are several factors that could easily lead to one more price spike before the market pares back its gains: weak July/Aug trading volumes paired with the ever-present threat from hurricane season in the Gulf of Mexico remain an underlying bullish threat.

Mirroring equity markets, most commodities have pushed over or near highs for 2009 mainly on the back of anaemic fundamentals. That is with the exception of bunker fuel, much to the chagrin of tanker operators and other consumers of the crude by-product. Much has been written as of late regarding Fuel Oil’s recent rally- actually with some fundamental backing to it (refinery upgrades and producer cuts of heavy, sour crude lead many traders to believe bunker prices will continue to power upwards for the foreseeable future).

With this level of uncertainty in the market, it would benefit bunker consumers to hedge a portion of their fuel needs both in the swaps and options markets. Aside from positioning themselves to lock-in future prices at today’s levels by buying swaps, costless collars and similar structures provide some downside advantages while also providing full upside price protection above a certain price. For example, in Singapore Fuel Oil 180cst, unlimited upside protection above $450 can be owned in Sept through December ’09 by accepting a price floor at $390. Similarly, consumer protection between $450 and $500 can be had by accepting a much lower price floor of around $355. This strategy currently avails the consumer of approximately $60 of downside price movement paired with $50 of protection above $450.

Singapore

Trading Ranges, Singapore Fuel Oil Consumer Hedging

Crude prices remain mired in the $64 – 66 range despite Department of Energy inventory figures showing a draw of 1.8m bbls. The figure was largely in line with traders’ expectations, but conflicted sharply with that of Tuesday’s API report showing a build in crude stocks. The numbers in the DOE report were largely the result of a slight decrease in crude runs paired with drooping imports. Despite seven weeks of crude inventory draws, US stocks remain significantly above levels from the previous year.

July and August typically exhibit a moribund trading pattern with decreasing volumes but leaning more to the bullish side. Commodity traders expecting equity markets to pull crude prices higher may have to wait until holiday season is over, as both markets have experienced recent rallies and appear to have entered a holding pattern.

Bunker consumers seeking cheap but effective upside protection in the 4th Quarter of the year can look to a Singapore 180cst Fuel Oil costless 3-way structure. The Q409 $425 / 475 call spread can be owned for zero cost by accepting a price floor at $345. This hedge allows for $50 of upside protection per month above $425 with no premium at risk above the $345 level. With the Q409 underlying trading just under $400 and implied vol in the mid-40’s, the $345 price floor is almost 5 standard deviations to the downside and a level not broken below since $350 became a solid price floor two months ago. Regardless, the hedge allows for more than $50 of downside price movement (good for the consumer) with $50 of upside protection above $425 with no premium at risk upon settlement at or above $345.

Singapore

Updated Consumer Hedge Swaps and Collar option strategies

Consumer Hedge Swaps and Collar option strategies

ETFs swing size to Natural Gas

Investor interest has moved sharply away from front crude ETFs to natural gas. This phenomenon has potentially given support to natural gas futures despite bearish fundamentals.

Consolidation Continues; Singapore Fuel Oil Trading

Crude markets moved higher yesterday on the back of a weaker US dollar and renewed economic optimism (both ArcelorMittal and Posco announced steel production increases owing to greater demand). The front-month WTI contract had fallen approximately 10% since last week before regaining some composure and ending a 5-day losing skid. It should be noted that as of 9am in Singapore, front-month WTI is down once again more than $1.00. Surprisingly, the unleaded gasoline crack did not lead the way higher (as had been the case for the recent 2-month rally) as stocks of that product showed another weekly build according to API data. Expect the Western benchmark feedstock contracts (WTI & Brent) to continue to trade as an asset class at least in the short-term, mimicking equities and moving inversely to the US dollar while ignoring near-term supply overhangs and lingering geopolitical issues.

Asian Fuel Oil prices will continue to ape those of the broader energy complex. Thus, while the Singapore Fuel Oil 180cst swap may not exhibit much of a trend in early trading, the contract will certainly be to a large extent beholden to trends in the heavily traded Western contracts, despite the selling pressure from refiners the previous week. The WTI and Brent rally should prove short-lived as the market continues to exhibit consolidation signals and yesterday’s price action was only a reinforcement of this thesis. Traders looking to short near-term implied volatility in the Fuel Oil market may be interested in the August09 Sing FO 180 $350/425 strangle (selling a price floor and ceiling) at around $25.00/MT. Upon expiration, this trade yields $25,000/1000MT between $350 and 425, with breakeven at $325 and $450. Below $350 the trader is long from that price and above $425 short from that level.

Singapore

Geo-Politics and Consolidation

Energy markets ended last week on a soft note, however upward momentum remains in place. Bullish World Bank forecasts for Chinese GDP growth along with a reported increase in American motor-vehicle travel (the first year-on-year increase in almost 1.5 years)will provide further ammunition for the “green shoots” argument. Geo-political issues appear to be rearing their ugly head after many months of relative calm from the production side. Renewed attacks on Nigerian pipelines, civil unrest in Iran and reports of a US Navy Destroyer tracking a N Korean vessel have had limited impact on crude prices at this point.

Crude prices gave up much of the gains for the week on the back of poor price action in the gasoline complex on Friday. Weak US equities as well as bearish US inventory data earlier in the week helped pull front-month Unleaded below $2.00. The sharp drop in prices was due in part to expiration-day crack spread trading, which involves traders rolling out of the July contract and into August. As mentioned, however, the overall positive price momentum remains in place on the back of optimistic economic and investor sentiment.

Tracking crude and product prices for the past several weeks reveals an obvious consolidation pattern- similar to that seen in most equity indices. Many traders have begun to position themselves for a possible retracement lower, either by buying downside put options or simply taking profits on long swap positions. In fact, the CFTC reported that last week net speculative longs actually dropped more than 20% to just above 92,000 contracts. Traders looking to take advantage of the recent consolidation phase by selling implied volatility can look to sell the Brent APO August $65/75 strangle at around $5.00/bbl ($5,000 of premium per 1000 barrels with breakeven at $60 or $80 upon expiration).

Singapore

Obama proposal suggests all OTC derivatives to clear on exchange

Excerpt from Obama proposal issued June 17, 2009

"To contain systemic risks, the Commodities Exchange Act (CEA) and the securities laws
should be amended to require clearing of all standardized OTC derivatives through
regulated central counterparties (CCPs). To make these measures effective, regulators
will need to require that CCPs impose robust margin requirements as well as other
necessary risk controls and that customized OTC derivatives are not used solely as a
means to avoid using a CCP. For example, if an OTC derivative is accepted for clearing
by one or more fully regulated CCPs, it should create a presumption that it is a
standardized contract and thus required to be cleared."

http://www.financialstability.gov/docs/regs/FinalReport_web.pdf

Singapore Fuel Oil Hedging

The weakening trend begun early Monday is expected to continue into Asian trading today. Crude appears to have found both support and resistance levels firmly within $2 of $70, while price action in Singapore Fuel Oil 180cst should look quite similar. Unable to break through and settle consistently above the psychological $400 mark, energy markets including Sing FO look to be taking a breather. It is specifically this type of consolidation which will allow for further moves higher. The danger being, of course, of a slow grind lower where WTI and Brent break through support levels on their way back to a 5-handle (pricing in the $50 range) with Fuel Oil exhibiting similar short-term weakness and trending below $300. However, even with considerable Western-benchmark weakness, Fuel Oil cracks may remain strong as a result of Opec production cuts (which consist predominantly of the heavy-sour crude).

Consumer hedgers looking to protect against Sing FO 180 pushing above $400 can also use hedging to profit from a Brent weakening (and thus a further narrowing of the price differential between light, sweeter crude and heavy-sour crude). The August09 Sing FO 180 $410/460 call spread can be owned for only $3.00/MT when the $350 put is sold. Similarly, the August09 Brent $55/65 put spread can be owned for zero cost by selling the $79 call for financing. This type of trade positions the consumer hedger to profit from a narrowing of the sweet-sour spread. It also functions to provide protection against a strengthening of bunker fuel as a result of production and refining fundamentals vs a weakening of Brent/WTI due to a slowing of investment flows.

Singapore, 09:00

Expectations for $75

Energy markets gained fresh legs last week from a number of positive economic indicators enabling both WTI and Brent to settle firmly above the $70 level. The end of the week saw Chinese retail sales and factory output increasing substantially while the EIA released surprisingly bullish inventory data. The IEA added to the bullish trend by issuing a forecast for a rise in crude demand on the back of an expected increase in energy consumption in the US and China. While these numbers can certainly be viewed as optimistic in the short-term, it remains to be seen whether there is significant underlying strength (post-stimulus) in this economic recovery, particularly in regard to China’s private sector demand.

Expectations for this week center on the push by WTI and Brent to break through near-term resistance around the $75.85 level. Otherwise, expect a slow and painful drift lower. The fact remains that funds and various speculators have been piling into the market as of late (last week crude longs increased 3.5% to 206,000 while speculative longs surged more than 7% to 118,000 contracts according to the CFTC) and thus there is enormous paper length invested in a further move higher. From a psychological perspective, the more we rise the more those who missed most of the “fun” will feel pressure to jump in now and not miss any more of it. Expect significant upward pressure to continue.

Monday morning begins with market participants digesting bullish news of incumbent Ahmadinejad’s re-election victory in Iran. Given the lack of a significant retracement since bouncing off $66, many consumer hedgers and traders are reluctant to simply purchase swaps to protect/profit from further moves higher. Instead, call spreads and call spreads partially financed by put sales are more in demand. For instance, the Brent APO August $80/90 call spread can be owned for only about $1.75 ($8,250 possible payout vs only $1,750 of risk). Similarly, the Brent APO December09 $85/110 call spread can be owned for only $1,500/1000bbls when the $61.50 put is shorted to provide financing.

Singapore

Crude Above $70; Singapore Fuel Oil 180cst Hedging/Trading

As predicted, crude surged above $70 early in the week before the market had a chance to succumb to weak longs and profit taking around the $68 level. Bullish US API data including a crude draw of almost 6M bbls only served to pull more longs into the energy complex. It also doesn’t hurt that the Dollar appears to have resumed its downward trajectory, falling 1% against the Yen and Euro and almost 1.5% against the Pound.

WTI settlement after NY trading yesterday above $70 was key to the move higher and any EIA reinforcement tonight of the already released API inventory data will serve to underpin $70 as support. Part of the reason for the crude draw was feedstock inventories pulled through by refiners to take advantage of profitable crack spreads. While the Singapore Fuel Oil 180cst crack may not strengthen much more in the short-term, it is expected to hold around its current level and thus the underlying should rise in parallel with WTI and Brent. As with $70 in the western benchmarks, expect the $400 level (if broken and settled above in July in the next 48 hours) to become psychological support for further moves higher.

Consumer hedgers/traders seeking to position themselves against a short-term push higher can look to own the Singapore FO 180 July09 $420 Call for zero cost by selling two $375 Calls in the same tenor. Similarly, the $450/500 call spread can be owned for zero cost by accepting a single price floor at $370.

Singapore

Implied Vol Increases; Brent Vol Strategies

Energy markets gained fresh legs off last week’s rally from the Wednesday lows. The main catalyst for the price strength was job losses in the US slowing remarkably while the unemployment rate continued inching closer to 10%. Despite the often volatile trading, both WTI and Brent ended the week more than $2 higher than the preceding week and only about $0.40 lower on the day. Expect continued strength in the crude markets so long as the less-than-terrible economic news continues to flow and the Fund assault on $70 persists. This (psychological) level needs to be tested and broken immediately or else WTI and Brent will find themselves drifting back down to retest $65.50.

The steadily increasing yield on US Treasuries is not yet a major cause for concern as this remains an important indicator of economic activity returning to some level of normality. The 10-Year yield remains under 4%, not particularly alarming from a historic point of view, however the upward trend can be viewed as possibly an early alarm bell in debt markets signaling future trouble with capital raising (a la Latvia).

Implied volatility levels increased substantially across the energy complex after crude broke through and then retreated below the $70 level. As mentioned, an immediate assault on this price point needs to be launched again to prevent languishing around $66 for the next week. Brent traders looking to take advantage of the recent pop in implied vol to collect relatively high premiums can sell the Brent APO Aug09 $60 puts for around $1.00/bbl or perhaps the July09 $65 puts for approx $1.60/bbl. Traders looking for the market to remain rangebound between $65-72 may consider selling the Brent APO July09 $65/75 strangle for $3.20/bbl.

Singapore

Fresh Legs for Energy; Brent Crude Collar

Just as predicted, fund buying returned to the market yesterday and resumed the push to $70 in Brent and WTI benchmark crude. Support held firm around the $65.50 area and paper length saw Wednesday for what it was: an excellent buying opportunity, pushing July WTI to a 2009 high of $69.60. It didn’t hurt that GS yesterday introduced a newly minted bullish stance, both near- and long-term.

US unemployment data is due for release later today, and any surprise to the upside (read: not terrible news) should result in fresh paper buying. Psychological resistance will weed out some of the weak longs around $70, and a push above should bring us to the real ceiling around $71.85. Lastly, expect the typical Friday flattening up of short positions (as if we needed another reason unrelated to fundamentals to push higher).

Despite yesterday’s rally, implied volatility levels remain at Wednesday’s relatively inflated heights. Strong producer/hedger buying in the puts has resulted in the much talked about put skew- allowing for advantageous consumer collar buying. Traders looking for a near-term break above $70 can opt for the ICE Brent APO July09 $75 Call for zero cost by selling two $61 puts in the same tenor.

Singapore

Energy Markets Re-trench; Singapore Fuel Oil Hedging/Trading

Energy markets traded without much direction yesterday as equities also looked undecided. Increasing fund flows have resulted in benchmark commodity contracts trading largely as an asset class (hedge against future inflation, hedge/trade against Dollar weakness) and with recent less-than-terrible economic news being reported (Chinese demand, ISM surveys) it appears there is too much long paper entering the market to call a top in energy futures. This also leads to the question as to whether the recent equity and commodity rally has over-compensated for the humble signs of recovery we have been observing. Basic energy supply and demand would tell us we have certainly gotten ahead of ourselves in the short-term, leading traders to not put much stock in the weekly US inventory data outside of the short spike in volatility seen immediately after the release of the numbers.

Despite yesterday’s lacklustre trading (and continuation of the implied vol implosion), the trend to the upside across the energy complex remains firmly intact. With recent IMF predictions of an 11% drop in world trade, one would expect bunker prices to remain mired near recent lows. This is not to be seen however, as Singapore Fuel Oil 180cst continues its assault on $400. As crude pushes for the inevitable break over $70, so FO follows to break through $400 and build support at that level. The current move higher began after breaking convincingly above $280, a price point briefly retested before the market pushed to today’s heady levels.

Consumer hedgers looking to protect against further near-term upside moves in bunker prices can own a zero-cost price ceiling in July Sing FO 180cst at $400 by also accepting a price floor at $370 leveraged twice. For those looking for limited downside risk, the July $420 price ceiling can be owned for zero cost by selling the $320/385 put spread in the same month. This hedge offers unlimited upside protection above $420 with $65 of risk on the downside.

Singapore

Strong Asian Demand; ICE Brent Hedging/Trading

In the course of the last couple weeks we’ve seen several new highs for the year, and Friday was no exception. Closing out the week on the back of increasing pressure from the gasoline market, a spiralling (lower) dollar and a rally in equities, crude markets ended the month of May with gains of upwards of 30%. Economic data is the predominant catalyst pushing energy markets higher, and it is Asia that appears to be leading the charge in this respect. Industrial Production results for Asia during the month of April were surprisingly optimistic, highlighting the strength of the hoped for and much-discussed Asian recovery. This is no more apparent than in China where motor-vehicle sales and increased Ethylene production (related to Naptha demand) reveal a boosted oil demand picture.

After last week’s archetypal production meeting, Opec decided not to adjust announced output levels while also stating they expect higher near-term prices in the range of $75-80. According to the CFTC, crude longs increased by more than 9,000 contracts last week to 187k while speculative net longs also increased approximately 8% to 101.6k. On further moves higher, aside from psychological resistance at $70, expect significant selling pressure from profit-takers around $71.85.

Implied volatility has decreased substantially across the entire feedstock and product complex. Despite soft At-The-Money vols, the put skew remains elevated in crude markets, thus allowing consumer hedgers to own relatively better priced upside protection by selling inflated-priced puts for financing. For instance, the ICE Brent APO 2H09 $80 call can be owned for zero cost by selling the $57.50 put in the same tenor. Similarly, the ICE Brent APO 2H09 $80 call can be owned for zero cost when the $50/60.50 put spread is sold. This position results in unlimited upside protection/gains above $80 with only limited loss potential on the downside ($10.50/month).

Singapore

Opec Statement; Brent Hedging/Trading

Traders took their cue from Saudi Oil Minister Ali Naimi’s comments yesterday that the world economy is strong enough to endure $75-80 oil. The cartel’s de facto spokesperson provided fresh legs for what looks like the beginning stages of a push into the high $60’s for WTI and Brent. Look for resistance around $65.00 (mostly psychological), more specifically $64.85 and $65.20. Above these levels, look to scoop up some cheap puts around $67.12 as the market will encounter severe resistance at this point.

Energy markets may continue to ignore the enormous supply overhang in the short-term as inflationary pressures (manifest in rising long-term U.S. Treasury yields) have found a home in crude oil. Consumer hedgers and traders looking to be on-board for the next possible move higher can take advantage of the recently inflated put skew to finance the purchase of calls. For instance, the ICE Brent August09 $70 call can be owned for around $2.50/bbl or for zero premium by selling the $58 put in the same tenor. Similarly, the Brent December09 $70/85 call spread can be owned for zero cost by selling the $58.50 put.

Singapore

Rally gets Fresh Legs, Singapore Fuel Oil Hedging

After dropping more than $2.00 in late Asian trading yesterday, crude prices rebounded to fresh 2009 highs. It was once again equities that propelled energy markets higher as investors chose to ignore a record drop in US housing prices, surging foreclosures and the now routine nuclear bomb explosion in N Korea. The only thing that can stop crude prices looks to be the commodity’s own self-fulfilling prophecy of higher prices resulting in yet another global economic slowdown. This phenomenon looks to be far off in the distance however, as traders now set their sights on the $70 mark (still less than half the heights from one year ago). The U.S. Dollar faired surprisingly well yesterday as traders are now focused on the growing crisis in the European banking system.

Yesterday’s decisive move higher after bouncing off lows more than 1 standard deviation to the downside may have removed the last of the doubters to this rally. Expect strong price action this morning in Asia, despite enormous inventory overhangs of both crude and products. Paper length appears to be in the driver’s seat and Singapore bunker fuel consumers may wish to hedge their upside against the inevitable push towards $400. Currently, traders can take advantage of the inflated put skew to help pay for a relatively better price ceiling than in recent months. For instance, the Sing FO 180cst 3Q09 $380 price ceiling (call) can be owned for zero cost by accepting a price floor (put) around the $340 level. Similarly, the 3Q09 $370/430 call spread can be owned for zero cost by selling the $325 put in the same tenor.

Singapore, 09:00

Long Weekend, Markets Push Higher; Brent Hedging

Energy markets traded predictably higher on Friday after a tumultuous week which saw crude oil gain $5 and settle at 2009 highs. Traders often position themselves long (or at least buy protection against shorts) going into a long weekend (U.S. markets are closed Monday due to the Memorial Day holiday). Expect trading conditions to be subdued this morning as crude oil sits well above support (WTI having bounced off $60.50 last week) and traders begin the push later in the week for the 200-day moving average at $63.28. A strong move above this level would propel further fund buying, likely resulting in increased volatility and wider trading ranges as not much resistance is evident below $70 (which stands not as strong technical resistance but merely a psychological barrier).

Strong buying in the gasoline complex should continue to pull prices higher. The unleaded gas refinery margin continues its relentless march on $20 after finishing a very strong week above $15. Let’s also not forget about U.S. dollar weakness as well as creeping inflationary fears (funds have been buying crude as an inflation hedge). While inflation has yet to show itself, the short dollar long crude trade has worked well for several weeks now. This is part of the reason for the inflated put skew in crude markets. Traders have been buying downside protection in the form of puts while maintaining and in many cases increasing net longs in the swaps market.

Traders looking to enter the crude market before the next push higher can lock in limited losses with unlimited upside potential gains by buying swaps and puts or put spreads. Currently, the Brent APO July09 $53 puts are only $1.20/bbl. Similarly, $45/55 put spread is also trading around $1.20/bbl, offering more immediate protection but limited to $10.

Singapore, 08:00

Oil Market Volatility Index Falls To 1-Year Low

By Gregory Meyer
Of DOW JONES NEWSWIRES


NEW YORK (Dow Jones)--As the stock market's "fear gauge" retreated this week, an important measure oil-market jumpiness fell to its lowest in a year.

The Chicago Board Options Exchange's crude-oil volatility index, or OVX, on Wednesday dropped to 40.74, its lowest since last May. The decline came after the more closely watched VIX volatility index, which tracks the prices for options on the Standard and Poor's 500-stock index, slid below 30 for the first time since last September's collapse of Lehman Brothers Holdings Inc.

Stock pickers say the VIX reflects market anxiety, and tends to rise when markets fall and fall when stocks turn around.

For the oil market, lower volatility doesn't necessarily carry the same bullish implications. Commodities, with their messy cycles of supply lagging demand or vice versa, are inherently more volatile than stocks. But the crude index's decline suggests traders collectively think huge price swings are a thing of the past, at least for the time being.

The OVX also isn't a perfect gauge of oil market sentiment, as it tracks options traded on the United States Oil Fund LP (USO), an exchange-traded fund, rather than futures themselves. Because the U.S. Oil Fund is traded like a stock, the OVX may pick up some cross-contamination from bigger trends in the equity markets.

Nevertheless, traders say the oil market has gotten a shade less wild, even with prices climbing back above $60 a barrel. OVX topped 100 in December.

"Nobody expects crude to go through the roof anytime soon," said Chris Thorpe, managing director at Hudson Capital Energy, a New York oil-options dealer.
Thorpe said trading in options on U.S. crude futures currently imply prices could rise or fall about 45% in the next year - well below last year's peak of more than 100% implied volatility.

On a daily basis, oil-options trading reflects expectations U.S. crude could move by nearly 3% daily, or about $1.70 a barrel at today's $61 oil price, said Harry Tchilinguirian, oil analyst at BNP Paribas in London.

Some traders are apparently still betting prices could again go haywire, even as glutted oil inventories and ample spare capacity among producers suggest otherwise.

Traders said that in the past couple of weeks, people have acquired options to buy crude at $250 and even $300 a barrel in future years, meaning they can book a profit if oil prices rise above those astronomical levels. On Thursday, they said, one such $250 call option for crude to be delivered in December 2010 sold for 15 cents a barrel.


-By Gregory Meyer, Dow Jones Newswires; 201-938-4377; greg.meyer@dowjones.com

Upward Pressures; Singapore Jetkero Hedging

Energy markets surged yet again yesterday, moving higher on the back of further optimism for US equities (GS, MS and JPM all applied to refund a total of about $45B in TARP funds), a weakening Dollar and several fires at large US refineries. The unexpected refinery problem caused a surge in the gas crack, pushing the July refinery margin well over $15 and closer to the $20 predicted by this column last week. Look for resistance in crude around $60.50, while a surprise build in US inventory numbers (analysts are predicting a draw at this point) could cause a return of profit-taking resulting in a re-testing of the $58.85 level. Although at these levels, a continued push higher is vastly more likely.

Product implied volatility remained mostly unchanged through yesterday’s rallies. California Jet Fuel prices looked strong and thus similar price action can be expected in the Singapore Distillates once crude begins its usual late-Asian trading day rally (currently the markets are unchanged to slightly lower due to retracement on the back of recent rallying and low liquidity, but expect strength later in the day).

While implied vols remained largely untouched yesterday, the put skew which first appeared several weeks ago was further strengthened. As the market pushed relentlessly higher shrewd traders have scooped up puts for the inevitable retracement lower, thus bidding up the right to short the market. Consumer hedgers of Singapore Jetkero can take advantage of the inflated put values by selling them to finance price caps for the remainder of the year. For instance, Sing Jetkero prices can be capped at $75 to as high as $100 for the second half of 2009 for about $3.00/bbl while unlimited protection can be bought at $80 for the same tenor by accepting a price floor at $60.

Singapore, 09:00

Crude Retracement; Hedging

Energy prices softened on Friday as profit-takers took the hint from bearish European economic data as well as recent Opec statements. The producer’s cartel recently warned of the excessive supply overhang in relation to consistently weak demand. While Open would certainly enjoy higher crude prices, the group is wary of the volatility high prices would engender at this stage of the global economic meltdown/bottom. Speculative money continues to prop up prices and support in WTI at $56 remains intact despite Friday’s market weakness.

Distillate cracks continue to look weak, especially in relation to the gasoline margin which settled above support at $14. Speculative inflows should help to push the gas crack towards $20 as we approach summer driving season in many large consumer countries.

Consumer hedgers looking to take advantage of Friday’s drop in underlying prices also have a softening of implied volatility working in their favor. Currently, the WTI Aug09 $60/70 call spread can be owned for only about $2.70/bbl or for zero cost by selling the $53.50 put in the same month. Similarly, the $60/70 call spread can be owned for only $1.00/bbl by selling the $50/55 put spread. Max loss on this trade is confined to the width of the put spread ($5) plus the $1 premium paid for the call spread.

Singapore, 09:00

Short Covering, Singapore Jetkero Hedging

Traders are on edge coming into Friday morning’s trading session as the classic end of the week short-covering rally pushed crude markets higher yesterday. Sentiment appears to have shifted once again to the upside as bears couldn’t drive WTI below support at $56. The gasoline crack strengthened once again as it is the unleaded market which continues to provide the impetus for propelling the entire energy complex higher.

Yesterday’s move will provide further incentive for speculators and hedge funds to enter the market in greater numbers. As the Dollar continues to struggle expect to see a push in the next few days to break through Tuesday’s high of $60.08. The market persists in being propelled higher by further investment flows into the sector.

In the jetkero market, California jet differentials remained for the most part unchanged throughout the volatile trading. Several regional carriers have been reporting losses recently- Singapore Air has highlighted hedging losses from positions taken while crude prices were much higher, while globally airlines continue to battle sagging customer demand which hasn’t been helped by the ongoing battle against the H1N1 virus.

Consumer hedgers can currently take advantage of the inflated put skew (expensive puts) to enter into collars with relatively less downside risk than with the typical put skew pricing. The Singapore Jetkero 2H09 $80 call can be owned for zero cost by selling the $60.50 put in the same tenor. This hedge provides unlimited protection above $80 for every month in the 2H09 with downside risk in Sing Jetkero below $60.50 only. For those hedgers looking for less downside exposure, the $80 price cap can be owned for only $1.30/barrel per month when the $48/56 put spread is sold. The downside risk in this scenario is merely the width of the put spread ($8) plus the premium paid for the $80 call ($1.30).

Singapore, 09:00

Energy Markets take a Breather, Singapore Fuel Oil Hedging

Energy markets took a breather yesterday, experiencing mostly sideways trading as equities in western markets trended lower. Despite the weakness in stocks, crude oil held firm above support levels leading to an increase in implied volatility as traders try to glean insight into the market’s next direction. Pressure remains to the upside as both WTI and Brent are poised to break through the $60 level. While signs are starting to emerge signaling market weakness (a significant flattening of the Fuel Oil contango indicates an imminent correction) expect one final push higher before short-term supply/demand fundamentals result in a much-needed correction back towards support around $53 in WTI and $320 in Singapore Fuel Oil 180cst.

The cost of owning downside puts has increased markedly in the past few days as producer hedgers have entered the market to take advantage of the recent price run-up. This put skew blow-out has effected product markets as well, producing a scenario quite favorable to consumer hedgers. Traders short physical bunker fuel can use a collar structure to protect against further price rises while also taking advantage of the increase in put option prices. The Sing FO 180cst June $350 call can now be owned for Zero Cost by selling the $330 put in the same month. Similarly, the June $350/380 call spread can be owned for Zero Cost by selling the $313 put. This hedge provides $30 of upside protection with no premium at risk at or above $313 if the hedge is held to expiration.

Singapore, 09:00

Optimism Continues/ WTI Hedging & Trading

Front-month crude continued the push on Friday for new 2009 highs on the back of unemployment data out of the US that was less-bad than expected. The optimistic trend for both commodities and equities that began more than a month ago gathered new legs last week as results from the bank stress-tests proved also to be less dreadful than anticipated. Financial flows into ETF’s and also from hedge funds continue to be the main catalyst in this rally. Watch for profit taking as WTI and Brent edge closer to $60 as this price belies the short-term supply glut, demand weakness and producer spare capacity. Also, expect less aggressive moves for storing physical product, as the strong rally has significantly narrowed the contango futures curve.

Opec cuts, being largely from Saudi Arabia, the UAE and Kuwait, have been in the medium to heavy sour grades. This is where price stabilization and the current move higher first began. However, it has clearly been financial flows which have pushed near-term crude prices (even those of the light, sweet variety) to new highs for the year.

Implied volatility has softened daily for the past two weeks as crude inched higher. While At-The-Money options and upside calls have become relatively cheaper (in implied vol terms), the put skew has recently been gaining attention. Many traders long from the mid-$40’s have taken advantage of the unabated push higher to purchase downside protection in the form of puts. Buying puts remains a safer strategy than simply selling swaps, even with the elevated put skew. The WTI July $40/50 put spread is currently trading around only $0.80/bbl and the July $45/55 put spread can be owned for zero cost by selling the $65 call.

Singapore, 09:00

Resistance Becomes Support/Singapore Jetkero Hedging

Energy markets continue to push higher as front-month June WTI convincingly broke through $56 yesterday. The July contract which is also heavily traded remains $1.20 over June and thus only about $2.50 from the $60 level (thus representing only about a 1.5 daily standard deviation move). A smaller than expected EIA inventory report proved the final spark as equity markets continue to rally and the US dollar persists in weakening.

Refined products also took part in yesterday’s rally with distillate crack spreads softening somewhat. Gasoline prices have shown strength recently as demand for the product has shown signs of life. Consumers appear to have been taking advantage of lower prices at the pump to do more driving. Questions remain as to what extend the H1N1 flu strain will damage the already staggering airline and travel industry.

Singapore Jetkero prices have steadily regained ground in the past week on the back of strong rallies in crude markets. The June contract has broken through resistance around $63 and looks to turn the ceiling at $65 into a new support level. One bright spot in the rally is that option premiums continue to soften, allowing consumer hedgers the opportunity to lock-in current prices before panic sets in due to further price rises. The 2H09 Sing Jetkero $75 price ceiling can be owned for only $2,000/1000 barrels when the $50/60 put spread is sold in the same tenor. Selling the put spread essentially cuts the call price in half and allows for a limited and known possible loss on the downside.

Singapore 09:00

Topping the Range/Singapore Fuel Oil 180cst Hedging

Energy markets continued their push higher yesterday on the back of optimistic stimulus news from China as well as that country’s outperforming industrial construction data. Despite the need for several major Western banks (Citi, Wells & BofA) to immediately raise more capital, it is optimism that we have “hit bottom” and the resulting financial flows into the commodity sector that continue to buoy the market.

However, look for profit taking on the recent run-up as June WTI is now trading around resistance at $54.50 as well as the top of the long-term $44-55 range. Singapore Fuel Oil 180cst looks to be trading at a similar resistance level ($320) after experiencing the same late April pullback and subsequent rally as that of WTI. Tuesday and Wednesday should make for interesting trading as US inventory numbers are released and we move closer to the next Opec meeting where production quotas are expected to remain unchanged.

Implied volatility levels softened further as crude prices pushed to the top of the recent range. Expect Singapore Fuel Oil option premiums to be relatively cheaper in Asian trading Tuesday morning. Fuel Oil hedgers worried about further price rises (but cognizant of the market trading on recent highs) can look to buy upside protection in the form of the June Sing FO 180 $325 Call. A portion of the cost of this price ceiling can be negated by selling the June $280/300 put spread. Thus, the maximum downside exposure on this hedge is limited to $20 plus the required premium outlay for the call.

Singapore, 08:00

Short-Term & Long-Term Outlooks/WTI Hedging & Trading

Financial markets continue to play a large role in crude oil’s recent consolidation phase. The current out-performance of several Western equity indexes, such as the S&P 500, have indicated optimism that the worst of the recent economic decline is behind us. Several fresh economic surveys have shown surprising results to the upside, with the Institute for Supply Management’s factory index revealing U.S. manufacturing is shrinking at a much slower pace than expected. It is now possible to read in the data strong indications of a soon-to-be-expected improvement in oil demand. Further out along the futures curve, relatively tighter supply/demand fundamentals as well as expected inflationary pressures leading to a weaker U.S. Dollar have put a firm cushion under both crude and product markets.

Of course, stubbornly high inventory levels should continue to act as an overwhelming weight balancing out any medium- to long-term bullish pressure. Despite Friday’s sharp rally, expect front-month WTI to pare back gains and drop once again towards $50 as the June contract failed to move convincingly above resistance at $53. Expect similar bearish price action in Asian markets as many traders return from the recent holiday weekend.

Long traders and producer hedgers looking to take advantage of the recent rise in crude prices can buy the Asian (APO) June WTI $55 put for around $4.00. This short strategy provides maximum downside profit potential with only $4 of potential losses to the upside. Similarly, the $60 call can be sold to finance half the purchase price of the $55 put (this strategy is also somewhat riskier while providing more immediate downside exposure).

Singapore, 09:00

Decoupling of Equities & Commodities/Sing FO Hedging

Expect further downward pressure across the energy complex as today’s EIA report should further highlight historically elevated inventories against enduring demand weakness. Equity sentiment continues to soften due to further capital raising issues at Citi, not to mention the hit investor confidence is taking from the yet-to-be-contained swine flu. Whether the tie that has bound crude markets to equities continues to deteriorate or not, the supply & demand fundamentals of the oil and products market have become too apparent to be ignored. Thus, expect light-sweet crude to push lower to the $45 mark while Singapore Fuel Oil 180cst should also test recent lows. Both markets have failed recently to push convincingly above resistance levels ($52 for WTI and $300 for Sing FO) and the Fuel Oil market in particular looks to be sitting right on key (and weak) support levels.

Physical traders long Singapore Fuel Oil and looking to protect against a short-term downward move should look to own a price floor (put) in June09 Sing FO 180 at the $270 level for $19,000/1000MT. This put floor can be made cheaper by instead buying the June09 $230/270 put spread for only $14,000/1000MT. Lastly, the June09 $270 price floor can be owned for zero cost (with unlimited downside protection) by accepting a price ceiling (short call) at the $295 level.

Singapore, 09:00

Swine Flu Worries/ Sing Jetkero Hedging

Worries over the new swine flu dominated talk on trading floors yesterday as commodity markets followed equities lower. Risk aversion and pessimism stepped back into the spotlight forcing the selloff, although the energy complex did recover markedly in late NY trading.

Opec and non-Opec exports remain flat with westbound tanker movements regularly showcasing dramatic declines. From the product standpoint, most cracks experienced little movement as newfound pessimism drove markets lower in tandem. Plenty of focus was on the airline stocks and jet fuel demand yesterday as the spread of the swine flu threatens to do further damage to an already impecunious industry. Finished products such as jetkero, gasoline and other distillates may be facing fresh downturns in demand now that a global pandemic may be added to the list of the global economy’s problems.

Implied vols experienced a slight bump yesterday due to the severity of the price drop and unexpectedness of the cause. As the consolidation in crude markets becomes more apparent, expect volatility to decrease and option premiums to do likewise. The Singapore Jetkero Second Half of 2009 $75 call can be owned for only about $2,500 per 1000bbls/month when the $125 call is sold at a ratio of 2000bbls/month. Similarly, the Sing Jetkero 2H09 $75 call can be purchased for Zero Cost by accepting a price floor (short put) at the $55 level.

Singapore, 09:00

Mixed Pressures/WTI Hedging

After a slow week, traders returned to energy markets on Friday, pushing many benchmarks back near the previous week’s highs. Nymex WTI rallied almost $2 to settle back above $50. Not surprisingly however, implied volatility continues to decrease across the product sector with more range bound trading expected for the foreseeable future. A softer U.S. dollar and decreased volatility in the financial markets along with what appears to be a delicate stabilization of the global economy have improved investor risk tolerance and put a temporary bottom under the price of commodities. On the flipside, the previously mentioned bloated global inventory situation alongside the IMF’s recent slash in its worldwide economic growth forecasts will continue to place supremely bearish pressure on the oil and products sectors. Furthermore, Opec Secretary General Abdalla El-Badri recently stated that he doesn’t expect any announcement of further production cuts at the group’s next meeting in May.

Consumer hedgers looking to take advantage of the significant drop in implied volatility as of late should look to own a WTI Second Half of 2009 price ceiling (call) at $65 for an average price of only about $4,000 per 1000 barrels/month. Much safer than simply buying swaps, this hedge offers max losses limited to only $4/barrel per month without the prospect of margin calls. However, the price ceiling can be owned for zero cost by accepting a price floor (short put) at $50. With the 2H09 underlying swap trading above $56.50, this collar strategy allows for an average of more than $6.50 of breathing room on the downside with unlimited protection above the $65 level.

Singapore, 09:00

Further Consolidation, Sing Jetkero Hedging

Energy markets traded slightly higher on very light liquidity yesterday. Benchmark contracts continue to mirror equities as crude futures rallied on the back of a late-day push higher in the DJIA. Fundamentals, including crude stocks at 20-year highs appear powerless to pull the market lower while equities hold onto gains from last month. WTI contango did narrow, as December 2009 traded almost $1.00 closer to the front-month June contract. So long as the benchmark WTI contract trades around $50, expect congested market conditions for the major products. Support remains firm around $48 in June09.

Prompt California Jet fuel prices moved staunchly higher yesterday as sellers raised offers alongside the crude rally. Expect a slow rally in prices during the second half of 2009 due to production cuts, with consolidating action for the next several months. Singapore Jetkero buyers can protect against a rise in prices later this year by purchasing a July through Dec09 price ceiling at $75. This call option can be owned for free by accepting a price floor (short put) at $55. This type of collar hedge typically requires less margin than simply buying swaps with the added benefit of less-painful daily mark-to-market swings.

Singapore, 09:00

Crude Trending Lower, Sing FO Hedging

U.S. crude stocks now sit at a two-decade high as yesterday’s inventory data pointed to a further increase of 3.9m barrels. Refinery utilization rose 3% resulting in surprise builds for both distillates and gasoline stocks. Curiously, the build in crude stocks was greater than most analysts anticipated, even with the increase in refinery utilization. Furthermore, WTI prices actually rose slightly after a day of lacklustre trading yesterday. This scenario points to the strong connection between crude prices and equities, as the energy market appears to be trading as a proxy for short-term global economic health. This has been true for more than a month now, as crude prices topped $55 recently on the back of better than expected earnings from the financial sector. Regardless, fundamentals cannot be ignored forever and recent statements from the IMF regarding the “remote” likelihood of a rapid rebound in commodity prices were felt on trading floors yesterday as a near-term push lower in crude prices is looking all the more plausible.

Singapore 180 Fuel Oil traders looking to protect against a near-term drop in prices can still take advantage of the recent push towards $300 by buying a May09 price floor (put) at $270 for Zero Cost by selling a price ceiling (call) at $299. This Collar trade is a safer play than simply selling swaps as it provides almost $15 of breathing room on the upside before losses accumulate. Similarly, the price floor provides for unlimited downside protection below $270.

Singapore, 09:00

Jet fuel poised for lower prices

Despite higher crude oil prices, we notice that inventories in crude oil and distillates (including jet) remain very high. Distillates, in particular, are at the highest level we have seen in years.

There are two potential scenarios here for timing your jet fuel hedges for the remainder of 2009 and even 2010.

1) Crude could fall as inventories continue to be high and production cuts from OPEC are offset by non-OPEC countries. This assumes demand is flat to down. In this case, it is likely the front months that fall most, leaving 2010 reasonably high. Our recommendation is to avoid crude oil swaps in the near term.

2) Heating oil and jet-kero could fall independently (reducing the distillate crack spread) as inventories remain high and demand remains sluggish. We are more convinced this second scenario is likely given what we see in inventory and street indications of weak demand. In this case, heating oil options will be well valued for consumers looking to lock in a lower crack spread for the remainder of the year.

Finally, if you are looking to get some portion of hedges on sooner, consider a heating oil call spread for the balance of 2009. For example, the second half Asian style $1.60-2.00 Call spread is offered for 12.5 cpg. This offers excellent upside protection at a reasonable price and has no downside risk if the market tumbles.

In 2010, the heat crack is also reasonably valued by historic standards at approximately $8.90 per barrel (offer). While we normally suggest that longer term hedges are best using crude oil options, using heat through 2010 does not pose too much of a cost challenge.

Please call or email if there is a particular strategy you would like to review or price.

New York, 17h00 - 4/16/09

Energy Price Action, Singapore Jetkero

Energy markets bounced back yesterday but reaffirmed $50 in WTI as a new level of resistance after that same price point failed to provide support during Monday's sharp retracement lower. Despite the rally, the broad contango structure remains in place across most markets. Expectations of further crude inventory builds to be announced tonight (following the pattern we've seen as of late) are mostly to blame for the resilience of the contango futures curve.

Not surprisingly, product margins on average were weaker on the rally, as we expected the lack of demand for most of these products to be a main catalyst in front-month market weakness. California Jetfuel differentials however held firm throughout the WTI rally and traders can expect to see follow-through to the upside in the Sing Jetkero contract today (barring a subsequent dump in WTI/Brent during early Asian hours. Implied volatility also increased for the second day yesterday, further highlighting questions as to whether Sing Jetkero has dropped back down into its most recent trading band.

Consumer hedgers looking to the second half of the year for protection can take a breather from the current volatility by locking in a wide collar. With the 2H09 Sing Jetkero Calendar Swap currently trading around $63, a price ceiling (call option) at $80 can be owned for zero premium by accepting a price floor (put option) at $52. This type of hedge typically will have much less mark-to-market volatility than simply buying swaps, in other words if the underlying continues to drop, margin calls should be comparatively less painful.

Singapore, 08:00