Energy markets ended last week on a soft note, however upward momentum remains in place. Bullish World Bank forecasts for Chinese GDP growth along with a reported increase in American motor-vehicle travel (the first year-on-year increase in almost 1.5 years)will provide further ammunition for the “green shoots” argument. Geo-political issues appear to be rearing their ugly head after many months of relative calm from the production side. Renewed attacks on Nigerian pipelines, civil unrest in Iran and reports of a US Navy Destroyer tracking a N Korean vessel have had limited impact on crude prices at this point.
Crude prices gave up much of the gains for the week on the back of poor price action in the gasoline complex on Friday. Weak US equities as well as bearish US inventory data earlier in the week helped pull front-month Unleaded below $2.00. The sharp drop in prices was due in part to expiration-day crack spread trading, which involves traders rolling out of the July contract and into August. As mentioned, however, the overall positive price momentum remains in place on the back of optimistic economic and investor sentiment.
Tracking crude and product prices for the past several weeks reveals an obvious consolidation pattern- similar to that seen in most equity indices. Many traders have begun to position themselves for a possible retracement lower, either by buying downside put options or simply taking profits on long swap positions. In fact, the CFTC reported that last week net speculative longs actually dropped more than 20% to just above 92,000 contracts. Traders looking to take advantage of the recent consolidation phase by selling implied volatility can look to sell the Brent APO August $65/75 strangle at around $5.00/bbl ($5,000 of premium per 1000 barrels with breakeven at $60 or $80 upon expiration).
Singapore
Sunday, June 21, 2009
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