Singapore Fuel Oil 180 Options

Hudson Capital Energy is now making markets in Nymex cleared Sing FUEL OIL 180 Asian-style options. As with the newly clearing JetKero options, the ability to create and price structures such as Costless Collars in just seconds during Asian trading hours will help us provide shipping companies and bunker traders with enormous liquidity in this once opaque OTC-only market. This note is part of a Singapore Products Report our group will be distributing twice per week to possible counterparties who may be interested in trading Sing Fuel Oil 180 options.

Similar to the JetKero market, Singapore Fuel Oil 180 swaps rebounded in mid-December after falling from spectacular highs of around $800 per Metric Ton during the summer. The market seemed to find a bottom in early December before rebounding somewhat around the Christmas holiday. The futures curve now appears to be trending higher with the March 2009 contract forming a double bottom around the $200 level. As with WTI and similar energy markets, the trend now appears to be consolidation after 5 months of unrelenting price drops. It is this consolidation that has helped to bring about a relative drop in implied volatilities.

Hedgers who bought swaps during the market fall would have benefitted enormously from the purchase of cheap downside puts. It is this simple stop-loss strategy that may help hedgers who choose to short the market at these lower levels by selling swaps. Cheap upside calls are available to limit losses on short swap positions (limiting hedging losses regardless of physical exposure). The Feb09-June09 $300 call strip is valued around $31.00 with the underlying calendar swap settling just under $265. This option position does not need to be held until expiration, any sharp move higher in the FO market will result in an increase in value for these calls, which can then be sold out and the profits used against the losses from the short swap. Of course, as expiration approaches, the options will begin to lose value at an increasing rate. The call strip value can be cut almost in half to approximately $18.00 of exposure by selling the $200 put in the same tenor. This trade will result in the hedger getting long below $200, thus cancelling out the protection from the short swap at that point.

Singapore, 09:00

Volatility falls off a cliff

Crude volatility was down sharply, 10% today, down from 86 to 76.  February crude options expired today and the Feb-March crude spread remains wide at $7.00.  Financial markets in general were down sharply with negative news from the retail sector and major banks.

Heating oil inventory builds were much higher than expected (+6MN bbls) following weekly data released today.  The strong distillate cracks have been supported by European natural gas tightness and cold weather systems both in Europe and northeastern United States.   With this large build in distillates, the market took heat cracks off by $1.75.  The RBOB improved by $1.5, pushing it very high versus the last 3 months.  

We feel that there is limited downside here and calls will become more expensive versus puts soon.  This is a good time to think about buying calls as the general market sentiment remains bearish (for now).  We may test new lows, but that reinforces a call or call spread buying strategy versus long futures or swaps.

New York, 16hoo.