Tuesday, July 28, 2009
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
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
Wednesday, July 22, 2009
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
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
Friday, July 17, 2009
Wednesday, July 15, 2009
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.
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