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.

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