Bearish news grabbed the headlines and pulled energy markets lower on Friday as front-month WTI dropped almost $2.00 and settled close to the critical $50 support level. Late-day selling of US equities combined with a resurgent Dollar to weaken the recent bullish sentiment. Traders set their sights once again on Opec, as it was announced in a report by Petrologistics that the producer cartel’s output remains 1M bbls/day over announced targets. Tanker tracker Oil Movements reported a sharp decline in oil exports from the cartel (excluding Angola and Ecuador), specifically a drop in crude oil exports to a level not seen since June 2003. This apparent uncertainty in actual production on a daily or weekly basis is one factor contributing to the still high level of implied volatility in oil markets.
Friday’s drop in prices has exacerbated the market contango structure, making it increasingly likely that floating storage will begin to increase yet again. Eight VLCC’s were employed to hold approximately 16M total barrels of Forties crude less than two months ago. That number has since dwindled to about three but may increase on the back of a renewed contango curve.
The currently high crude inventory levels are expected to dissipate in the second half of 2009, which along with the re-purchase of inventory hedges and a possibly weaker Dollar, is expected to lead to a sustained rally in commodity prices. Traders can look to take advantage of front-month WTI possibly testing the $50 support level as well as December 2009 rallying towards $70. Using American-style options, the WTI May $50 puts are trading around $2,200 per 1,000 barrels while the December $60/75 call spread can be owned for Zero Premium by selling the $48.50 put.
Singapore, 08:00
Sunday, March 29, 2009
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