Short Covering, Singapore Jetkero Hedging

Traders are on edge coming into Friday morning’s trading session as the classic end of the week short-covering rally pushed crude markets higher yesterday. Sentiment appears to have shifted once again to the upside as bears couldn’t drive WTI below support at $56. The gasoline crack strengthened once again as it is the unleaded market which continues to provide the impetus for propelling the entire energy complex higher.

Yesterday’s move will provide further incentive for speculators and hedge funds to enter the market in greater numbers. As the Dollar continues to struggle expect to see a push in the next few days to break through Tuesday’s high of $60.08. The market persists in being propelled higher by further investment flows into the sector.

In the jetkero market, California jet differentials remained for the most part unchanged throughout the volatile trading. Several regional carriers have been reporting losses recently- Singapore Air has highlighted hedging losses from positions taken while crude prices were much higher, while globally airlines continue to battle sagging customer demand which hasn’t been helped by the ongoing battle against the H1N1 virus.

Consumer hedgers can currently take advantage of the inflated put skew (expensive puts) to enter into collars with relatively less downside risk than with the typical put skew pricing. The Singapore Jetkero 2H09 $80 call can be owned for zero cost by selling the $60.50 put in the same tenor. This hedge provides unlimited protection above $80 for every month in the 2H09 with downside risk in Sing Jetkero below $60.50 only. For those hedgers looking for less downside exposure, the $80 price cap can be owned for only $1.30/barrel per month when the $48/56 put spread is sold. The downside risk in this scenario is merely the width of the put spread ($8) plus the premium paid for the $80 call ($1.30).

Singapore, 09:00