Front-month crude continued the push on Friday for new 2009 highs on the back of unemployment data out of the US that was less-bad than expected. The optimistic trend for both commodities and equities that began more than a month ago gathered new legs last week as results from the bank stress-tests proved also to be less dreadful than anticipated. Financial flows into ETF’s and also from hedge funds continue to be the main catalyst in this rally. Watch for profit taking as WTI and Brent edge closer to $60 as this price belies the short-term supply glut, demand weakness and producer spare capacity. Also, expect less aggressive moves for storing physical product, as the strong rally has significantly narrowed the contango futures curve.
Opec cuts, being largely from Saudi Arabia, the UAE and Kuwait, have been in the medium to heavy sour grades. This is where price stabilization and the current move higher first began. However, it has clearly been financial flows which have pushed near-term crude prices (even those of the light, sweet variety) to new highs for the year.
Implied volatility has softened daily for the past two weeks as crude inched higher. While At-The-Money options and upside calls have become relatively cheaper (in implied vol terms), the put skew has recently been gaining attention. Many traders long from the mid-$40’s have taken advantage of the unabated push higher to purchase downside protection in the form of puts. Buying puts remains a safer strategy than simply selling swaps, even with the elevated put skew. The WTI July $40/50 put spread is currently trading around only $0.80/bbl and the July $45/55 put spread can be owned for zero cost by selling the $65 call.
Singapore, 09:00
Sunday, May 10, 2009
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