Market Update: End of Third Quarter

DOE Inventory Statistics (in millions of barrels): Crude +2.8, Distillate +0.3, Gasoline -1.6, Refinery utilization -1.0%, Cushing -1.6

A big rally today in crude followed statistics that were in-line with expectations, aside from refined products which had smaller-than-expected builds. Heat and RB cracks seem to have hit some key support levels where economics are thin for refiners collectively in the US. Consequently, crack spreads improved by $0.50/bbl. Technical analysts saw key levels broken in crude which drove it much higher than we expected. The average investors/funds were neutral but we believe index investors needed to increase positions going into Q3.

At this point, we again caution against short swaps or short futures positions even though we would be looking for a pull back Thursday and Friday. Otherwise, short futures with a call stop loss strategy. The December $80 call is worth $1.60/bbl. That does not look too expensive against the backdrop of a weak USD and Iran risk.

For those covering inventory, the October $62-67 Asian crude put spread works nicely for $1/bbl. If you have room to sell upside, use the $73.5 call to create a zero cost 3-way.

Regarding regulatory reform efforts, the SEC and CFTC are jointly reviewing how to harmonize their approaches to market regulation and are expected to publish a report on October 15th. One of the points that will be studied is "National market and common clearing versus separate markets and exchange-directed clearing."

Sources: EIA (http://www.eia.doe.gov/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/wpsr.html), SEC (http://www.sec.gov/news/press/2009/2009-211.htm)