Reaction to The Treasury's Plan and Fuel Oil Hedges

A quick note that Jonathan Kornafel, HCEnergy's Director of Asia will be speaking at the 6th Annual China Derivatives Summit in Shanghai on the topic of “Energy Market Volatility and Hedging & Trading Strategies” this Wednesday.

Commodity and equity markets in the West rose sharply yesterday after the US Treasury’s bad debt plan received a positive reception. Markets were thin however, as many traders were attending the annual NPRA conference in Texas. The link between oil and equities is important to note, as it serves to highlight the lack of fundamentals currently driving the market. The Treasury’s plan was greeted with approval for its size and scope, fundamentally a result of the absolute depths to which the global economy and demand have plunged. Any inflation/weak Dollar-induced rally needs to be taken with a grain of salt, as these issues will not confront the market for at least several quarters, most likely a year. There are however, a number of bullish supply-side issues currently demanding attention, such as the nationwide oilworkers strike in Brazil which is expected to immediately affect both Gasoline and Fuel Oil output, as well as a threatened three day strike of Nigerian oil workers.

While the Brazilian strike may add a short-term cushion to Fuel Oil prices, expect the products market to be the main catalyst to pull feedstock markets lower. Both California Diesel and Jet fuel differentials came under pressure yesterday during the rally. Singapore Fuel Oil is currently trading back up near the top of the range first established in late November 2008. This represents an excellent opportunity for producer hedgers to lock in solid downside protection that hasn’t been available for more than a month. The Sing Fuel Oil Q209 $245 price floor (put) is currently offered around $20.00 per MT and can be owned for zero cost by accepting a Q209 price ceiling (call) at $288. Physical traders currently long product and not fully hedged can sell upside calls to help defray added costs. The April Sing FO $280 calls are currently bid around $50,000 per 5000MT and expire on the last trading day of April.

Singapore, 09:00