Opportunities in a Contango Market

The geopolitical premium continues to bleed out of crude prices as Russia and Ukraine look to settle their dispute and resume gas flows. Last week’s poor US unemployment figures continue to reinforce weak consumer demand while traders await further data this week with a sense of trepidation. Along with CPI and PPI numbers, retail demand and industrial production data look set to drag equity and commodity markets lower. The only bright spot in terms of consumer demand may be that as worse economic data is released, the US Congress may be motivated to push for faster action on a larger stimulus plan.

Opec production cuts, near- to medium-term consumer demand destruction and excessive crude inventories contribute much to the current contango market structure. Traders looking for continued weakness in the near-term with the possibility of recovery in the longer-term can take advantage of structures such as the Feb09 through June09 $35 put strip with the July09 through Dec09 $85/95 call spread strip. The combined structure is currently trading around only $2,800 per 1000 barrels per month. This trade provides near-term downside exposure (the Feb-June underlying calendar strip is trading just below $49.00) while also providing long-term upside exposure (July-Dec underlying calendar strip is trading around $55.50) with only $2,800 per month at risk.

Singapore, 09:00