Energy markets took a breather yesterday, experiencing mostly sideways trading as equities in western markets trended lower. Despite the weakness in stocks, crude oil held firm above support levels leading to an increase in implied volatility as traders try to glean insight into the market’s next direction. Pressure remains to the upside as both WTI and Brent are poised to break through the $60 level. While signs are starting to emerge signaling market weakness (a significant flattening of the Fuel Oil contango indicates an imminent correction) expect one final push higher before short-term supply/demand fundamentals result in a much-needed correction back towards support around $53 in WTI and $320 in Singapore Fuel Oil 180cst.
The cost of owning downside puts has increased markedly in the past few days as producer hedgers have entered the market to take advantage of the recent price run-up. This put skew blow-out has effected product markets as well, producing a scenario quite favorable to consumer hedgers. Traders short physical bunker fuel can use a collar structure to protect against further price rises while also taking advantage of the increase in put option prices. The Sing FO 180cst June $350 call can now be owned for Zero Cost by selling the $330 put in the same month. Similarly, the June $350/380 call spread can be owned for Zero Cost by selling the $313 put. This hedge provides $30 of upside protection with no premium at risk at or above $313 if the hedge is held to expiration.
Singapore, 09:00
Tuesday, May 12, 2009
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