Energy markets gained fresh legs off last week’s rally from the Wednesday lows. The main catalyst for the price strength was job losses in the US slowing remarkably while the unemployment rate continued inching closer to 10%. Despite the often volatile trading, both WTI and Brent ended the week more than $2 higher than the preceding week and only about $0.40 lower on the day. Expect continued strength in the crude markets so long as the less-than-terrible economic news continues to flow and the Fund assault on $70 persists. This (psychological) level needs to be tested and broken immediately or else WTI and Brent will find themselves drifting back down to retest $65.50.
The steadily increasing yield on US Treasuries is not yet a major cause for concern as this remains an important indicator of economic activity returning to some level of normality. The 10-Year yield remains under 4%, not particularly alarming from a historic point of view, however the upward trend can be viewed as possibly an early alarm bell in debt markets signaling future trouble with capital raising (a la Latvia).
Implied volatility levels increased substantially across the energy complex after crude broke through and then retreated below the $70 level. As mentioned, an immediate assault on this price point needs to be launched again to prevent languishing around $66 for the next week. Brent traders looking to take advantage of the recent pop in implied vol to collect relatively high premiums can sell the Brent APO Aug09 $60 puts for around $1.00/bbl or perhaps the July09 $65 puts for approx $1.60/bbl. Traders looking for the market to remain rangebound between $65-72 may consider selling the Brent APO July09 $65/75 strangle for $3.20/bbl.
Singapore
Sunday, June 7, 2009
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