Today we saw a significant early rally in WTI crude, ending up $1.61/bbl, which we believe was largely due to front month short covering. This follows the anticipated fund crude "roll", where front month contracts are sold in order to buy following month contracts. Interestingly, the Brent contract did not see much of a rally and ended down 68 cents on the day.
The futures curve continues to flatten with December only $3 over May futures (WTI). Looking into the second half of 2009, here are some hedge strategies and prices:
1) Crude swap 5185:
a. $55 Asian WTI call ($6.60/bbl)
b. 55-75 @$4.70/bbl
c. Zero cost collar using the $60 call sells the $45 put
2) Heating Oil swap $1.39/gallon (second half).
a. $1.50 call @ 18 cents/gal OR $7.55 per bbl
b. $1.50 - $2.00 call spread is 12 cents/gal OR $5.00/bbl
c. Zero cost collar using the $1.60/gal call sells the $1.28 put
Keep in mind that the heating oil crack to crude is fairly depressed versus recent history. (See graphic above)
The reason for distillate price weakness this is largely due to:
Overcapacity in refining due to delayed turnarounds now nearing completion (supply higher) and new large capacity in India (Reliant)
Reduced demand in diesel specifically (15% lower in US)
Forced production of distillates when making gasoline into summer season. Higher inventories versus seasonal norm (see graphic #2 below)
Please call or email if there is a particular strategy you would like to review or price.
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