Crude Above $70; Singapore Fuel Oil 180cst Hedging/Trading

As predicted, crude surged above $70 early in the week before the market had a chance to succumb to weak longs and profit taking around the $68 level. Bullish US API data including a crude draw of almost 6M bbls only served to pull more longs into the energy complex. It also doesn’t hurt that the Dollar appears to have resumed its downward trajectory, falling 1% against the Yen and Euro and almost 1.5% against the Pound.

WTI settlement after NY trading yesterday above $70 was key to the move higher and any EIA reinforcement tonight of the already released API inventory data will serve to underpin $70 as support. Part of the reason for the crude draw was feedstock inventories pulled through by refiners to take advantage of profitable crack spreads. While the Singapore Fuel Oil 180cst crack may not strengthen much more in the short-term, it is expected to hold around its current level and thus the underlying should rise in parallel with WTI and Brent. As with $70 in the western benchmarks, expect the $400 level (if broken and settled above in July in the next 48 hours) to become psychological support for further moves higher.

Consumer hedgers/traders seeking to position themselves against a short-term push higher can look to own the Singapore FO 180 July09 $420 Call for zero cost by selling two $375 Calls in the same tenor. Similarly, the $450/500 call spread can be owned for zero cost by accepting a single price floor at $370.

Singapore