Market Commentary

Energies finished on the highs this week, following a week of bullish stats and a weakening USD. Refinery runs were particularly bullish for products with surprise RB draw of 5.1 MN bbls and a 4% decrease in capacity utilization. We note however that distillate inventories remain at decade highs and global mid distillate inventories remain high across the board. This likely keeps refining margins under pressure for some time to come.

The other big story of the week was the falling volatility in crude options. In a rising market, we often see volatility decrease. This was not the case last week when it was rumored that a larger player was buying longer-dated positions and keeping the options market firm. In the absence of this buyer, volatility trimmed 7% this week with a slight increase to the call skew. With this in mind, we suggest that short hedgers buy puts as an alternative to short futures strategies.

Examples: November WTI Asian $75.00 put is $2.00, OR consider the costless $75.00 put vs the $82.50 Call as a collar.

Natural gas note: Fundamentals remain bearish despite some near term cold. The Friday rally was another reminder of the unpredictability of the NG market. Despite the rally, the Nov-Dec spread went out to -$0.936, a bearish indication.