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

Focus Turns to the Downside

The rally in oil markets has proven to be short-lived as commodities followed equities lower on the back of further talk of bankruptcy for US auto makers General Motors and Chrysler. Curiously, the crude futures curve remained intact for the most part, leaving the recent broadening of the contango structure in place. The Dow pushing back towards 7000 paired with crude inventories at levels not seen since 1993 simply proved too much for the recent rally, and attention has once again turned to the downside.

Many traders see refined products as having led the way lower and refinery margins remained basically unchanged throughout yesterday’s market rout. It has been no secret that industrial fuel demand has been much harder hit than gasoline as a result of the current economic crisis. Oil products used to fuel power generation, transportation and industry have seen a relative collapse in demand. Singapore Fuel Oil backed off recent highs, and just as with crude oil, the product is trading back below support levels. Expect further downward pressure as implied volatility has increased, thus indicating a renewed focus by traders to the downside.

Option strategies can be used to hedge against any downside risk while providing for breathing room on the upside, thus decreasing and limiting painful margin calls. For instance, the Sing Fuel Oil 180 May09 $220/250 put spread can be owned for $12/MT. The max possible loss on this hedge is the total premium paid for it ($12), and it provides protection down to $220. The put spread can be owned for Zero Cost by selling the $298 call in the same tenor. With the underlying swap trading around $261, this zero cost strategy provides $30 of downside protection with $37 of breathing room on the upside.

Singapore, 09:00

Production & Storage Data

Bearish news grabbed the headlines and pulled energy markets lower on Friday as front-month WTI dropped almost $2.00 and settled close to the critical $50 support level. Late-day selling of US equities combined with a resurgent Dollar to weaken the recent bullish sentiment. Traders set their sights once again on Opec, as it was announced in a report by Petrologistics that the producer cartel’s output remains 1M bbls/day over announced targets. Tanker tracker Oil Movements reported a sharp decline in oil exports from the cartel (excluding Angola and Ecuador), specifically a drop in crude oil exports to a level not seen since June 2003. This apparent uncertainty in actual production on a daily or weekly basis is one factor contributing to the still high level of implied volatility in oil markets.

Friday’s drop in prices has exacerbated the market contango structure, making it increasingly likely that floating storage will begin to increase yet again. Eight VLCC’s were employed to hold approximately 16M total barrels of Forties crude less than two months ago. That number has since dwindled to about three but may increase on the back of a renewed contango curve.

The currently high crude inventory levels are expected to dissipate in the second half of 2009, which along with the re-purchase of inventory hedges and a possibly weaker Dollar, is expected to lead to a sustained rally in commodity prices. Traders can look to take advantage of front-month WTI possibly testing the $50 support level as well as December 2009 rallying towards $70. Using American-style options, the WTI May $50 puts are trading around $2,200 per 1,000 barrels while the December $60/75 call spread can be owned for Zero Premium by selling the $48.50 put.

Singapore, 08:00

Inventory Reaction and Sing Jetkero Hedging

Energy markets held firm in the face of bearish inventory data yesterday as crude stocks in the United States were reported to have reached levels not seen since 1993. WTI and Brent both softened on the day but support remains fixed at the $50level. In short, the longer the market can remain above this price point, the weaker any retracement below it should prove to be. The reported draw in Distillates can be traced to an increase in demand from continental Europe, but so long as crude is able to hold above $50, expect Products markets to remain firm as well. As expected, California Jet Fuel experienced a late day rally and so
Distillate traders in Singapore should be on guard for any type of follow-through.

Implied volatility softened slightly in the Products yesterday as the market appears to be range bound and unable to break out firmly to either the upside or downside. Hedgers with near-term exposure to further upside moves in Sing Jetkero can look to lock in protection in the form of the April-Sept09 $70/90 call spread for only $3.00/barrel. The premium required for the call spread can be cut in half by accepting a price floor (short put) at $53.00.

Singapore, 09:00

Reaction to The Treasury's Plan and Fuel Oil Hedges

A quick note that Jonathan Kornafel, HCEnergy's Director of Asia will be speaking at the 6th Annual China Derivatives Summit in Shanghai on the topic of “Energy Market Volatility and Hedging & Trading Strategies” this Wednesday.

Commodity and equity markets in the West rose sharply yesterday after the US Treasury’s bad debt plan received a positive reception. Markets were thin however, as many traders were attending the annual NPRA conference in Texas. The link between oil and equities is important to note, as it serves to highlight the lack of fundamentals currently driving the market. The Treasury’s plan was greeted with approval for its size and scope, fundamentally a result of the absolute depths to which the global economy and demand have plunged. Any inflation/weak Dollar-induced rally needs to be taken with a grain of salt, as these issues will not confront the market for at least several quarters, most likely a year. There are however, a number of bullish supply-side issues currently demanding attention, such as the nationwide oilworkers strike in Brazil which is expected to immediately affect both Gasoline and Fuel Oil output, as well as a threatened three day strike of Nigerian oil workers.

While the Brazilian strike may add a short-term cushion to Fuel Oil prices, expect the products market to be the main catalyst to pull feedstock markets lower. Both California Diesel and Jet fuel differentials came under pressure yesterday during the rally. Singapore Fuel Oil is currently trading back up near the top of the range first established in late November 2008. This represents an excellent opportunity for producer hedgers to lock in solid downside protection that hasn’t been available for more than a month. The Sing Fuel Oil Q209 $245 price floor (put) is currently offered around $20.00 per MT and can be owned for zero cost by accepting a Q209 price ceiling (call) at $288. Physical traders currently long product and not fully hedged can sell upside calls to help defray added costs. The April Sing FO $280 calls are currently bid around $50,000 per 5000MT and expire on the last trading day of April.

Singapore, 09:00

Sing JetKero

Energy markets continued their renewed push higher yesterday on the back of calls from Opec to increase compliance with already announced production cuts. WTI has now set a 3-month high in the push towards key resistance at the $50 level. Many traders have been caught off-guard with this post-Opec announcement rally and are looking for futures to turn within the week back towards $40. This prediction became all the more relevant yesterday as the API inventory numbers in the US came out overwhelmingly bearish.

Cracks showed considerable strength on top of the strong run-up in crude prices. California Jet Fuel differentials gained substantially, as did Nymex Heating Oil which is often used as a proxy by Airlines for hedging purposes. Singapore Jetkero and Distillate traders should be on the look-out for a near-term drive higher, while also guarding against the possibility that energy markets may turn and push lower. The Sing Jetkero 2Q09 $65 price cap (call strip) can now be owned for $1,500 per 1000bbls/month. Hedgers looking to offset half of the premium for this price cap while retaining some room for error on the downside can sell the $43.50 price floor (put strip) in the same tenor- resulting in a price cap premium of only $750. With the 2Q09 Calendar Swap currently trading around $55.00 this hedge results in breathing room of more than $11.50 on the downside, or more than six standard deviations.

Singapore, 09:00

Dow Jones Energy piece quotes HCEnergy

DJ Energy Options Volumes Fall As Traders Vanish

By Gregory Meyer

Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--Activity in the market for oil and natural-gas options has died down, leaving some traders stuck with expensive positions and raising costs for companies keen to lock in prices for their commodities.

Energy producers have in recent years shown growing interest in using options to guard against price fluctuations. Energy options give holders the right, but not the obligation, to buy or sell oil or gas at a set price before a particular date.

Over the past year, however, companies including Chevron Corp. (CVX) and Marathon Oil Corp. (MRO) have pulled back on options trading. They did this to present clearer earnings reports to nervous investors, unlock cash or simply ride out a market that has oil and gas futures prices trading down some 70% from last summer's highs. The credit crisis also pushed some speculators, such as hedge funds, out of options markets.

Crude oil options volumes were down 38% in January and February from the same two months last year, data from the New York Mercantile Exchange show.
In the
same period, crude-futures trading was up 9%. Natural gas options volumes dropped 65% in the period, while gas futures volumes declined by 18%, according to Nymex, a unit of CME Group Inc. (CME).

"Banks, institutional traders, proprietary books of business, hedge funds - the bulk of that business and participation is just not there anymore,"
said Pete Anderson, chief executive of futures broker FC Stone Group Inc.
(FCSX). "There's a significant lack of liquidity, especially in the longer-tenured positions, compared to what there was a year ago."

Risk Appetite Abates

Market participants point to a variety of causes for the falloff, from options prices rising amid surging volatility in the futures markets, to banks'
newfound aversion to lending to speculators.

The slowdown is apparent in the Nymex energy options pit, home base for most exchange-traded oil and natural gas options. While most energy futures trading has migrated to computer screens, the complexity of the options market has kept activity largely on the exchange floor.

"We have some clients we just haven't heard from," said Raymond Carbone, president of Paramount Options, a Nymex floor broker. Remaining clients are "playing but they're playing with a much smaller risk appetite," he added. "We have bigger lulls in the day."

Volatility in the futures markets has meanwhile soared - oil's one-day price moves have regularly topped 5% this year, for example. That means energy futures have been more likely to hit certain options strike prices on any given day, potentially putting options "in the money," or at a point where holders can cash in. In response, options premiums have climbed, making them too expensive for some commercial hedgers, said Chris Thorpe, managing member at options dealer Hudson Capital Energy LLC in New York.

"It gets less attractive" with fewer participants in the market, Thorpe said.
Traders "can't get in and out of trades quickly. They take on more risk for less profit."

Stranded In A Thin Market


The effects of thinning options volumes have been in some cases extremely expensive, with some traders forced to unwind bets placed when markets were more liquid.

FC Stone last week said it expects to lose $54.4 million on a customer's energy trading account. CEO Anderson said the positions were "primarily"
in
natural gas options held by its customer, a market-making firm he declined to name.

Aside from options traded on exchanges, there's also a vast over-the-counter energy options market whose trading volumes are unknown. The value of options on commodities other than precious metals stood at $4.9 trillion in June, the latest month for which Bank for International Settlements data are available.

With some options-dealing Wall Street firms on shaky footing, more over-the-counter agreements have shifted onto exchanges through channels such as ClearPort, CME's system for sending over-the-counter trades to the exchange clearinghouse for settlement. Daily trades cleared on ClearPort rose 39% in February and 50% in January compared with the same months a year ago, according to CME.

"Nobody wants to do business with banks because of the credit risk on the other side," said Adam Robinson, director of commodities at hedge fund Armored Wolf. "When you ClearPort the trades, you're facing the exchange, not facing the bank."


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

Trades to mitigate premium in periods of high volatility

Looking back over the last 20 years, we have very few periods of implied volatility to match what we have seen in the last 6 months. The two Gulf wars are the only examples that come close, and they were very short lived versus this most recent prolong volatility in petroleum markets. See graph.

The best way to combat the cost of option volatility in terms of options premium is by trading using a spread. This can be done using a collar (long put, short call or vice versa), in affect doing a volatility "neutral" trade. This can also be achieved with a put spread or call spread, to decrease risk or take a uni-directional hedge.

With the current market conditions continuing to be difficult to trade, we suggest buying put spreads to hedge inventory that is already in tank, or buying call spreads against future purchases for consumers. For Jet and Diesel consumers, the distillate crack is very well offered now, so heating oil call spreads are very attractive. A second half 2009 asian heat $1.50-$2.00/gal call spread is now worth $13 cents.

Opec Decision and Sing FO Hedging

Energy markets showed strength in late-day trading on Monday, recouping much of the losses from early Asian trading. WTI in particular surprised many traders by pushing higher on the day. This was after being offered more than one full standard deviation lower than unchanged, a volatile move which initially was a kneejerk reaction to Opec’s announcement of no more immediate cuts. Instead, the cartel took the much more shrewd step of stating it would focus on the remaining 800,000bbls/day it had previously announced it would remove from the market. By not announcing further production cuts, Opec took a gamble on not talking the market up with rhetoric that would see them have to remove more oil than necessary from the market to retain their hard-won credibility. Instead, by simply pushing to enforce greater accountability to recently announced cuts, the group’s compliance level should rise towards the 90% level; thus giving them greater pricing power in the long-term than simply taking the bait from the market and announcing more cuts than are necessary. Once digested, the market responded appropriately.

Consumer hedgers if not before, should now be on high-alert for futures prices to trend higher. Further cuts in Middle Eastern crude, especially of the heavy, sour variety will lead to increased upward pressure on Fuel Oil prices. Ali Naimi, the Saudi Oil Minister, has specifically stated that a WTI price of between $60-75 is crucial to allowing marginal producers to continue producing heavy oil. Bunker hedgers looking to protect against a near-term rise in Fuel Oil prices can look to owning a 2Q09 $255 price cap in Sing FO 180 for zero cost by accepting a price floor of $240 in the same tenor. This hedge provides for unlimited upside protection (just as with a swap) with the added benefit of less painful margin calls should the market trend lower (vs a swap hedge).

Consumer hedgers looking for immediate protection without risk accumulating immediately on the downside can own an option structure from April09 through Dec09 which pays out $800,000 per 10,000MT per month in Sing FO 180 if the underlying swap settles at the end of each month above the current price of approximately $255. If the underlying was to move lower, the hedge continues to pay out upon monthly expiration so long as the underlying settlement is not below $207. Below this level, losses begin to accumulate. Settlement at or above the current swap price of $255 results in payout each month of $800,000 per 10,000MT, equating to $80 of upside protection regardless of whether the underlying expires at the current price of $255 or $80 higher or anywhere in-between.

Singapore, 09:00

Refinery Action and Fuel Oil Hedging Strategies

Crude oil experienced significant price weakness yesterday on the back of profit-taking and a larger than expected inventory build. This occurred while Cushing WTI inventories indicated a slight draw due to turnaround season refinery demand. This is not to indicate refinery demand is relatively strong; in fact refinery runs are quite soft and the Singapore Fuel Oil market continues to witness a similar reduction in supply as refinery action continues to mitigate. The Fuel Oil market has felt an even more direct impact from Opec production cuts which have substantially removed medium and heavy sour crude from the market. While bunker fuel demand remains under pressure, the supply losses remain the foremost driver of market sentiment.

Sing Fuel Oil implied volatility remained unchanged yesterday after weakening significantly on Tuesday. The considerable drop in front-month FO enables consumer hedgers to lock in price caps or sell price floors at a level close to the bottom of the current near-term price range. An April Sing FO 180 $250 price cap (call) can now be owned for Zero Cost by accepting a price floor (put) at $231. Taking a different route, 10,000 MT of the $220 price floor (put) can be sold at $15.00 which indicates total premium received of $150,000 IF April Fuel Oil expires at or above $220. Below $220 the seller of the price floor still receives premium upon expiration so long as the underlying contract does not expire below $205 ($220 - $15 of premium received), below this point the hedge incurs losses equal to being long the underlying swap from $205. Similarly, if the underlying Fuel Oil swap moves higher the hedger will receive $150,000 of protection after expiration, basically mimicking a long swap position from $240 which is sold out at $255.

For a consumer hedger worried about a short-term rise in prices, the above strategy provides $15.00 of upside protection while not experiencing losses until the market moves below $205. With the tight trading ranges as of late, consumers with actual physical risk may opt for this strategy to reduce daily mark-to-market volatility seen with using only swaps for protection.

Singapore, 09:00

Sing Jetkero Consumer Hedges

Energy markets stumbled again yesterday as doubts surfaced as to whether increased refinery runs will continue to draw down excess crude stocks. Valero’s McKee refinery may be taken offline imminently as opposed to later in the year; this puts downward pressure on WTI as this would be one less major refinery processing feedstock into gasoline ahead of the summer driving season. Despite the Valero rumors, crude stocks are expected to have experienced a slight draw last week on the back of relatively strong unleaded gas margins.

Implied volatility in Products weakened yesterday due to the lack of follow-through on the recent bullish momentum. In the NY market, Jet fuel prices pushed lower after replacement costs via the Gulf Coast weakened. On the back of a similarly weaker crude market, sentiment can be expected to be negative heading into Asian trading for Sing Jetkero. This leads to further opportunities to lock-in price caps for 2010 before a much-anticipated trend higher begins in the second half of 2009. With the Sing Jetkero Cal10 underlying swap currently trading around $71, an $80 price cap can be locked-in for zero cost by accepting a price floor of $65 in the same tenor. For consumer hedgers looking for a limited price floor, the Cal10 $50/60 put spread can be sold to partially offset the price of a $75 price cap. By selling this put spread, the hedger has limited downside risk (only $10) while maintaining unlimited upside price protection above $75. The short put spread strategy enables the hedger to own a Cal10 $75 price ceiling at a deep 35% discount.

Singapore, 09:00

Heating oil crack now attractive for fuel hedging

Today we saw a significant early rally in WTI crude, ending up $1.61/bbl, which we believe was largely due to front month short covering. This follows the anticipated fund crude "roll", where front month contracts are sold in order to buy following month contracts. Interestingly, the Brent contract did not see much of a rally and ended down 68 cents on the day.

The futures curve continues to flatten with December only $3 over May futures (WTI). Looking into the second half of 2009, here are some hedge strategies and prices:

1) Crude swap 5185:
a. $55 Asian WTI call ($6.60/bbl)
b. 55-75 @$4.70/bbl
c. Zero cost collar using the $60 call sells the $45 put

2) Heating Oil swap $1.39/gallon (second half).
a. $1.50 call @ 18 cents/gal OR $7.55 per bbl
b. $1.50 - $2.00 call spread is 12 cents/gal OR $5.00/bbl
c. Zero cost collar using the $1.60/gal call sells the $1.28 put

Keep in mind that the heating oil crack to crude is fairly depressed versus recent history. (See graphic above)

The reason for distillate price weakness this is largely due to:
Overcapacity in refining due to delayed turnarounds now nearing completion (supply higher) and new large capacity in India (Reliant)
Reduced demand in diesel specifically (15% lower in US)
Forced production of distillates when making gasoline into summer season. Higher inventories versus seasonal norm (see graphic #2 below)

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

Two shares of Citi will get you a one-way subway ticket off of Wall Street.

Two shares of Citi will get you a one-way subway ticket off of Wall Street. Another sharp downturn in equities meant another devastating turn for energy yesterday. All eyes on front crude today with non-farm payrolls and the ubiquitous ETF roll underway.


NATURAL GAS

A 102bcf draw was relatively in line with consensus and brings storage to 1,793bcf, roughly 218bcf over the 5-year average and about 300bcf more year over year. The draw did not seem to get in the way of producer hedging which reportedly came through in the backs - evident in the big futures trading for the day (140,627 futures contracts)
There is a sea of mild weather coming up in the next week which will result in a very bearish EIA report on March 19th; however, a cold wave is expected to hit the Northeast just in time for the all the St. Patty’s day revelers. Consequently, end of March storage has the strong potential to come in under 1700bcf lending support to NG before the next leg down


CRUDE & PRODUCTS

Diesel Side Note: food processing companies are increasingly anxious about hedging CAL10. Although there does not seem to be significant concern about price risk for the balance of 2009 we caution that there could be some price increase. For example, parts of South America are having a lackluster hydro year and will need to keep diesel on-hand for electric power generation. Yesterday PDVSA announced that spot market distillate exports will drop in Mar/Apr amid simultaneous outages at the Cardon and El Palito refineries. Jet fuel exports will be limited to 7 cargoes, 2 less than in Feb; no high-sulfur diesel cargoes will be available, from the typical 2. Exports of low-sulfur diesel from the Puerto La Cruz refinery are seen at the usual 4 cargoes. PDVSA closed a jet fuel tender in late-Feb for 4 spot market cargoes in March. Jet fuel and diesel cargoes go mostly to the US and European markets. Venezuela normally exports 2 spot market cargoes of high-sulfur sulfur diesel and 6 more through government agreements. PDVSA said the refinery maintenance had "no impact" on exports (Source: Energy News Today)

Consensus seems to be building among end users that 2010 will experience some economic turnaround. And, more importantly, the current low prices out the curve is an opportunity to lock in hedges for international truck fleets


ROLL INFORMATION

The schedules for major Index rolling of spot Crude Futures: (“days” refer to business days)

Rogers Index (RICI):2nd to last day of month prior; last day of month; first day of expiring month

DeutscheBank (DBC): 2nd thru 6th days of expiring month

US OIL Fund (USO): lasts 4 consecutive days, for monthly start dates click on http://www.unitedstatesoilfund.com/uso_rolldates.html (starts today for April09)

DJ-AIG (AIGCI): 5th thru 9th days of expiring month

Goldman Sachs (GSCI): 5th thru 9th days of expiring month

Ranie Hotis, CFA
HCEnergy

Sing FO Caps and Floors

Crude markets pushed higher yesterday on positive news surrounding stimulus packages as well as newly released inventory and demand figures. China is expected to announce fresh stimulus measures today, news that will surely result in a sustained rally across refined products and crude feedstock. The world’s second largest oil consumer has quietly been adding to strategic reserves and recently ordered several refiners to increase production of gasoline after a marked rise in demand. Meanwhile, in the US gasoline demand continues to recover slowly and refiners have begun to step-up production as a result of the higher margins. Paired with a distinct decrease in imports, the 700,000+ draw in crude for last week was no real surprise.

Yesterday’s abrupt move higher resulted in a decrease in implied volatility, and thus cheaper option premiums. Expect the Singapore refined product markets to push higher today, particularly Fuel Oil as this market has recently been plumbing lows not seen since mid-Feb. Prior to the lows of several weeks ago, traders can mark out support levels back to late-December 2008 at around $200. As the current push higher can be traced to decreased supply, lower inventories and increased product demand, this may be the beginning of a sustained (albeit slow) move higher. As uncertainty has been removed from the market, option volatility has already begun to decrease noticeably. The Sing Fuel Oil 180 Q209 $300 call is currently offered at an average price of only $16.00 per MT and this upside price cap can be owned for zero premium by accepting a $210 floor in the same tenor. With the Q209 swap trading just over $240, this hedge offer substantial breathing room on the downside with unlimited consumer protection above $300.

Singapore, 09:00

Sing Jetkero Consumer Strategy

Energy markets vacillated yesterday following the sharp pull-back from last week’s recent highs. Unfortunately, the commodity markets appear to be taking their lead from equity markets, which while also plumbing new depths on Monday, took a short breather yesterday. With so much volatility and uncertainty having been introduced to markets in the last seven months, traders are having difficulty focusing on any longer-term trends, instead trading more off of at-the-minute information. Particularly harmful to sentiment was news that the US, Europe and Japan have experienced a drop in oil demand of almost 10% in only the past 3 years.

Despite the lack of movement, refined products showed a slight increase in implied volatility yesterday. Using April Sing Jetkero as an example, most observers would expect yesterday’s lack of movement to result in relatively lower implied vols and thus cheaper option premiums. However, the recent break below $50 has introduced renewed uncertainty to the market. This along with the broader energy market questions of how much lower can it go and when will it bounce (and how hard) continue to inject fresh ambiguity to the market. Sing Jetkero consumers can protect their future fuel purchases against exactly this type of market sentiment using simple option strategies. For example, 250,000 barrels of Sing Jetkero can be locked-in at a max price of $65 per barrel for the next 12 months (April09-March10) by accepting a price floor of $51 in the same tenor. This with an underlying calendar swap price of just over $56. Moving the price cap higher will similarly result in a lower price floor (and lower margin requirement with less mark-to-market volatility).

Singapore, 09:00

Sing FO Implied Vols

After a brief respite last week, downward pressure returned to commodity markets yesterday with front-month WTI driving back below the $40 level. Singapore refined products showed a similar pattern. Early in the day April Sing Fuel Oil 180 was offered close to $260 before pushing about one standard deviation lower to trade close to $240 in evening trading. The global economic turmoil continued yesterday with AIG announcing more than $60B in losses in Q408 and further bad news from a purchasing managers’ survey. Global trade has dropped dramatically in the past 4 months, amazingly contracting at a faster rate than during the Great Depression of the early 1930’s.

Traders who are currently long physical bunker can take advantage of the relatively elevated implied volatility to sell upside calls as a hedge. A simple example would be selling 10,000MT of the Sing FO 180 April $300 calls at $9.00 against owning the physical (currently April FO is trading around $242). This short call position acts as a sell-stop, making the option seller short at $309 upon expiration above that level ($300 + $9 premium received). Similarly, if the underlying expires below $300, the option seller receives the full $9 of premium on top of any gains or losses resulting from owning the physical.

Singapore, 09:00

Gasoline Demand Pushes Markets Higher

Energy markets pushed higher last week after strong signs emerged that gasoline demand in the US has stabilized and even increased. WTI ended Friday trading in NY just below the one-month highs set on Thursday. Gasoline futures weakened on Friday after a strong week of gains with similar price action seen in Singapore refined products, such as the Sing Fuel Oil 180 and Sing Jetkero swaps, all posting gains on the week after bouncing off support levels less than 10 days previously. Continually weak forecasts for oil demand due to poor global economic growth will persist in weighing heavily on energy markets, preventing any near-term sustained move higher. Instead, traders are betting on Opec’s high level of compliance with previously announced production cuts on top of an expected announcement of a further decrease of +1M barrels/day in March to push crude and refined prices higher in the second half of 2009.

Hedgers looking to protect against depleted inventories jolting crude markets higher in 2H09 can lock in a price ceiling and floor with very limited mark-to-market volatility vs the standard long-swap hedge. The WTI 2H09 $60/80 call spread strip can be owned for zero premium by selling the $42 put in the same tenor. This hedge provides $20 of upside protection per month above $60 with zero premium at risk at or above $42. With the 2H09 calendar swap currently trading around $52, the hedge provides for almost $10 of breathing room on the downside. It should also be noted that the margin requirement on this trade may be significantly less than that required for a typical long swap.

Singapore, 09:00