Oil Continues Higher, Singapore Fuel Oil 180cst Hedging

Energy markets took a breather yesterday during what appears to be a relentless march higher. Months, if not several quarters ahead of any significant return to demand, the current rally in the major crude benchmarks WTI and Brent has everything to do with a renewed demand for relatively riskier assets. This translates to day-to-day trading activity focusing almost exclusively on broader investment trends. The United States EIA inventory numbers due out tonight are expected to take a somewhat neutral tone, thus any surprise draws would give further impetus to the underlying rally, while builds may simply continue to be ignored.

Consumer hedgers (of any product) may wish to keep an eye on both WTI and Brent as the $75 level looks to be broken shortly. Twice we have bounced off this number in recent months as fears of the high price of crude derailing any nascent recovery begin to take hold.

Bunker prices continue to march higher on the back of increasing demand and refinery cuts, thus adding significant pain to shipping companies across the globe. Hedging strategies which utilize only swaps work best when a market simply moves in one direction. As the Western benchmarks approach $75 and another pull-back becomes possible, consumer hedgers can use options to take advantage of price swings lower while maintaining some measure of protection on the upside. The Singapore Fuel Oil 180cst Q409 $450/mt price ceiling (call option) can be owned for zero premium by accepting a price floor around $425. In order to reap the benefits of a possible (but not wholly likely) downward move in fuel prices in the final quarter of the year, hedgers can own the $450/500 call spread for zero premium by accepting a price floor at $375. This trade allows consumers to enjoy a healthy price drop of more than $60 before hedging losses begin while also providing $50 of protection per month above $450.

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