Fresh Uncertainties

A new sense of uncertainty has entered the energy complex this week as signs of oversupply appear to be topping out. The contango in March/April ’09 WTI has now dropped to less than -$2.00 as a result of the sharp rally in March futures above $43.50 yesterday, while longer-dated contracts such as December ’10 are now below $60. Global refined product demand continues to decline but the contango reversal can be considered a sign that a near-term bottoming out in front-month contracts may be occurring. While it is early to predict a drawdown in light, sweet inventories, Opec nations continue to enforce deep supply cuts which, while currently impacting the Brent/Dubai EFS most noticeably, will eventually follow-through onto the Brent and WTI global benchmark contracts.

Sing Fuel Oil implied volatility ticked higher yesterday as near-term contracts crested the $250 level and pushed towards resistance around $260. Increases in option premium often result in relatively cheaper spread strategies appealing to consumer hedgers. Done as a costless 3-way, these strategies provide limited upside protection with zero premium at risk within a certain price band. Indications: The Sing Fuel Oil 180 Q209 $260/320 call spread strip is currently offered at $21.00. To own the call spread strip for zero cost, the $209 put strip can be sold in the same tenor. Note: The term “strip” denotes an option structure trading in a number of months for an average price. Thus, buying the Q209 $260 call strip for $40.00 means that the owner has purchased the $260 call in April, May and June for an average price of $40.00 per month.

Singapore, 09:00