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
Tuesday, April 28, 2009
Monday, April 27, 2009
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
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
Sunday, April 26, 2009
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
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
Thursday, April 23, 2009
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
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
Wednesday, April 22, 2009
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
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
Thursday, April 16, 2009
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
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
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