Despite higher crude oil prices, we notice that inventories in crude oil and distillates (including jet) remain very high. Distillates, in particular, are at the highest level we have seen in years.
There are two potential scenarios here for timing your jet fuel hedges for the remainder of 2009 and even 2010.
1) Crude could fall as inventories continue to be high and production cuts from OPEC are offset by non-OPEC countries. This assumes demand is flat to down. In this case, it is likely the front months that fall most, leaving 2010 reasonably high. Our recommendation is to avoid crude oil swaps in the near term.
2) Heating oil and jet-kero could fall independently (reducing the distillate crack spread) as inventories remain high and demand remains sluggish. We are more convinced this second scenario is likely given what we see in inventory and street indications of weak demand. In this case, heating oil options will be well valued for consumers looking to lock in a lower crack spread for the remainder of the year.
Finally, if you are looking to get some portion of hedges on sooner, consider a heating oil call spread for the balance of 2009. For example, the second half Asian style $1.60-2.00 Call spread is offered for 12.5 cpg. This offers excellent upside protection at a reasonable price and has no downside risk if the market tumbles.
In 2010, the heat crack is also reasonably valued by historic standards at approximately $8.90 per barrel (offer). While we normally suggest that longer term hedges are best using crude oil options, using heat through 2010 does not pose too much of a cost challenge.
Please call or email if there is a particular strategy you would like to review or price.
New York, 17h00 - 4/16/09
Thursday, April 16, 2009
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