Crude Markets Retrench; Singapore Fuel Oil 180cst Hedging

A stronger US Dollar finally brought the crude markets lower yesterday, pulling WTI crude below the psychological $70 support level and outside of its recent $70-72 trading range. Despite the wide gap between WTI and Brent (just under -$3.00), the spread between the two major benchmarks remained mostly unchanged during yesterday’s fall. For those watching the price of crude on a day to day basis, the US Dollar and equities (investor sentiment) remain the chief catalysts for moving the market.

Traders should remain wary of recently surfacing short-term bearish sentiment in crude markets (not only from investor sentiment but also as a result of the latest negative comments emanating from OPEC re oversupply of refined products and subsequent effects on feedstock demand). Plenty of time still remains in the Atlantic hurricane season and meteorologists are closely watching a storm cluster recently formed off the coast of West Africa. Given past encounters between oil producers/refiners and hurricanes in the Gulf of Mexico, ignoring the possibility of a price spike in the next few months can certainly prove costly.

Much to the chagrin of shipping companies around the world, bunker fuel prices remain firm despite recent weakness in major Western benchmarks. Therefore consumer hedging remains a major factor in controlling one’s fuel costs. Establishing a price ceiling in Q409 through 1H10 in Singapore Fuel Oil 180cst at $450 for Zero Cost is possible by accepting a leveraged price floor in the same tenor at around $380. Similarly, for those seeking a non-leveraged position, the $450/550 call spread in each of the 9 months beginning with Oct09 can be owned for Zero Cost by accepting a price floor around $390 in the same tenor. This hedge provides $100 of consumer protection per month in Q409 through 1H10 with no hedging losses at or above $390.

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