Market Update: End of Third Quarter

DOE Inventory Statistics (in millions of barrels): Crude +2.8, Distillate +0.3, Gasoline -1.6, Refinery utilization -1.0%, Cushing -1.6

A big rally today in crude followed statistics that were in-line with expectations, aside from refined products which had smaller-than-expected builds. Heat and RB cracks seem to have hit some key support levels where economics are thin for refiners collectively in the US. Consequently, crack spreads improved by $0.50/bbl. Technical analysts saw key levels broken in crude which drove it much higher than we expected. The average investors/funds were neutral but we believe index investors needed to increase positions going into Q3.

At this point, we again caution against short swaps or short futures positions even though we would be looking for a pull back Thursday and Friday. Otherwise, short futures with a call stop loss strategy. The December $80 call is worth $1.60/bbl. That does not look too expensive against the backdrop of a weak USD and Iran risk.

For those covering inventory, the October $62-67 Asian crude put spread works nicely for $1/bbl. If you have room to sell upside, use the $73.5 call to create a zero cost 3-way.

Regarding regulatory reform efforts, the SEC and CFTC are jointly reviewing how to harmonize their approaches to market regulation and are expected to publish a report on October 15th. One of the points that will be studied is "National market and common clearing versus separate markets and exchange-directed clearing."

Sources: EIA (http://www.eia.doe.gov/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/wpsr.html), SEC (http://www.sec.gov/news/press/2009/2009-211.htm)

Distillate Fuel inventories in the U.S. continue to climb

The U.S. Energy Information Agency weekly statistics published yesterday morning included an unexpected 3 million barrel increase in U.S. distillate fuel inventories, pushing NYMEX Heating Oil futures down $0.05 for October and November 2009 delivery.

(Source: U.S. EIA, http://tonto.eia.doe.gov/dnav/pet/hist/wdistus1w.htm)

Markets Update, Singapore Fuel Oil 180cst Hedging and Trading

It was no surprise to see crude prices rebound yesterday, following the pattern of the last few months of a tightening, range bound market. The major western crude benchmarks are increasingly squeezing the $70 price point while Singapore Fuel Oil prices ping back and forth between $410 and $450.

Most analysts point to the weak US Dollar which yesterday fell short of key resistance levels vs a basket of major currencies. We feel that so long as global economic data continues to trend positive, the Dollar will experience further selling pressure which will not necessarily impact crude prices to the same extend as we’ve seen since mid-March. Rather, the overwhelming excess supply (Saudi Arabia’s spare capacity, OPEC member and non-member flooding of the market) paired with weak global demand (excess refining capacity, weak industrial demand- China’s oil imports fell in August while diesel demand is dragging behind the country’s economic growth) will continue in the short-term to keep a lid on prices despite Dollar weakness.

Last week’s trade recommendation continues to work well- in effect if Oct09 and Nov09 Singapore FO 180cst settle below $450, the trader is rewarded with a free Dec09 $450 call. Given the market’s range bound trading as of late, this trade continues to be popular. It remains possible to put this trade on for Zero Premium (no premium at risk below $450 in Oct or Nov), but with October expiration fast approaching, the door for this trade is fast closing (which in this case implies its effectiveness and profitability is only increasing).

Singapore

Consumer Hedge Tear Sheet: 09-17-2009

Markets Update, Singapore Fuel Oil 180cst Hedging and Trading

Investor risk appetite pushed the major crude benchmarks back above/towards $70 while exerting downward pressure on the US Dollar. With the greenback now trading at levels not seen for a full year, many would expect to see crude prices continue pushing higher. This has not been the case however, as seasonal downturns in Western oil demand will continue to exert negative pressure for the next several months.

Several bullish items were the focal point of traders’ discussions on the Floor yesterday. OPEC raised its global oil demand forecasts for 2010 while amending higher the current year’s expected demand by 0.14M b/d. Meanwhile, US Fed Chairman Ben Bernanke was quoted as saying the US recession “is very likely over”. However it is important to pair this info with data showing enormous excess global spare capacity. A recent article by Simon Parry titled “Revealed: The Ghost Fleet of the Recession” making the rounds amongst traders has also resulted in much debate. The article is well worth reading and can be found by searching the title on Google.

Many traders expect neutral to weak price action through mid-Nov followed by a year-end push higher (due to the (foolish?) expectation of increased global demand eating into excess crude and product stocks). Traders can use simple option structures to protect against a December surge in prices while posting zero premium (no premium at risk below certain price levels). For example, using Singapore Fuel Oil 180cst, traders can sell the October and November $450/500 call spreads and use that premium received to pay for the December $450 call. This trade contains no risk if Oct and Nov settle below $450 and has maximum upside exposure of $50 per month in Oct and Nov. Similarly, if Oct and Nov expire below $450, the trader has just received a free December $450 call with unlimited upside reward potential.

Singapore

Weak petroleum demand / Bullish markets

We note the API inventory data is again showing a large build in distillates (5.2 MN bbls).

Weak demand fundamentals in the US and Europe have driven petroleum cracks down to 12 month lows, forcing refiners to examine operating rates and length of planned turnarounds. High inventories have to be corrected at some point. Unless home heating demand is above average, we will need to see demand pick up in the rail, road diesel, aviation or maritime sectors to see a rebound in crack levels. Meantime, there is an opportunity to use NY heating oil or European gasoil options to hedge upside petroleum exposure in both crude and refining cracks.

Using the NY Heating Oil options (Asian) for a consumer hedge, the Q1 $2.00-2.50 call spread is offered at $0.1250/gallon. Adding a sale of the $1.70 put creates a structured 3-way option strategy for "zero" premium cost.

Please email or call to be added to the consumer hedge tear sheet blast.

New York, Sept 15.

September Bearish Pressure; Singapore Fuel Oil 180cst

The long-expected correction in crude and equity markets (can anyone tell the difference between the two these days?) appears to have begun this week. This despite relatively positive economic data permeating from across the globe- most recently positive ISM manufacturing data released in the US. The issue appears to be too much of a run-up too fast, as the pressure from a historically weak September and October bears down on investors and traders.

Much of the current fear from traders this week can be traced to indications from the Chinese government of a curb in bank lending. On the surface, this can be expected to result in lower energy demand across the board and in the words of Australian Treasurer Wayne Swan, a potential “knee-capping” of the economic recovery seen since March.

If bearish sentiment continues, expect to see a potential break below support levels in WTI around $67.35. Further declines in shipping rates due to reduced Chinese demand can be expected to continue, as reported in a Bloomberg survey earlier in the week highlighting expectations for a 50% drop in freight rates in the next 4 months.

Despite the approximately 10% rise in bunker prices last month and strong price support exhibited recently at ports globally (relative to WTI & Brent), inventory holders worried about short-term protection should not take bunker price strength for granted. A $420 price floor in October Singapore Fuel Oil 180cst can be locked-in for zero cost by accepting a price ceiling in the same month around $445. Similarly, suppliers holding inventory may wish to simply sell an upside price ceiling around the $480 level for around $15/MT. This type of hedge gives $15 of downside price protection while ensuring a payment of at most $15/MT upon an October expiration below $495.

Singapore, 08:00