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
Tuesday, June 23, 2009
Sunday, June 21, 2009
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
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
Thursday, June 18, 2009
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
"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
Tuesday, June 16, 2009
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
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
Sunday, June 14, 2009
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
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
Tuesday, June 9, 2009
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
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
Sunday, June 7, 2009
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
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
Thursday, June 4, 2009
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
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
Tuesday, June 2, 2009
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
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
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