Consumer Hedge Tear Sheet

Consumer Hedge Tear Sheet

Consumer Hedge Tear Sheet

Consumer Hedge Tear Sheet

Update: Financial Regulatory Reform

This past Monday Senator Christopher Dodd, Chairman of the Senate Committee on Banking, Housing and Urban Affairs, presented a 1,336 page draft bill on financial regulatory reform. The text includes 226 pages on OTC market reform which will be debated by his Committee next week. Additional proposals are expected soon from the Senate Committee on Agriculture, in addition to H.R. 4173, the bill passed by the House of Representatives on December 11, 2009.

'Commercial end-user' exemptions from mandatory clearing are an important point of debate among legislators, with certain market participants claiming that mandatory clearing increases transaction costs. On that note, two quotes from the bill are particularly relevant:

"Clearing more derivatives through well-regulated central counterparties will benefit the public by reducing costs and risks to American taxpayers, the financial system, and market participants."

"Trading more derivatives on regulated exchanges should be encouraged because it will result in more price transparency, efficiency in execution, and liquidity."

Impact on hedging: Following this rationale, Senator Dodd's bill contains a very narrow exemption to clearing requirements for commercial end-users. If Senator Dodd's proposal becomes law, all swaps and options that can be cleared must be cleared, unless one of the parties to a trade is too small to meet the eligibility requirements of an exchange. Markets would be allowed 180 days to comply with the legislation once it becomes law.

We will continue to monitor legislative developments as Congress begins the unusually active pre-election period. If you have any questions, please write or call.

EIA Weekly Petroleum Status Report

• A 1.0 million bbl increase in crude oil stocks and a 1.5 million bbl decrease in distillate stocks were in line with market expectations
• Gasoline inventories fell by 1.7 million bbl, almost 1 million more than expected, pushing the RBOB crack up $0.30-$0.40 in the front months
• Crude oil stocks at the Cushing, OK storage nexus fell by 700,000 bbl, though refinery utilization remains almost unchanged at 80.6%
• Both Exxon's Torrance, CA refinery and Chevron's El Segundo, CA refinery flared gas yesterday, suggesting mechanical issues
• OPEC ministers decided today to keep production unchanged, though Secretary-General al-Badri sought to apply moderate pressure to comply

 

New York Times: Gary Gensler's Conversion to Financial Reformer

The New York Times ran a story yesterday morning on CFTC Chairman Gary Gensler's efforts to reform US commodity markets. The full story is available by clicking here.

The article summarizes regulatory reform efforts by stating that:

The proposals include forcing the big banks that sell derivatives to conduct their trades in the open on public exchanges and clear them through central clearinghouses, so that any investor can see the prices that dealers charge their customers. Today, those transactions are bilateral and private.

The banks and their customers might have to post collateral or guarantees to prevent the kinds of panics seen during the financial crisis, in which some investors worried that trading partners might have trouble keeping their side of the contract.

In this way, the clearinghouses would work as circuit breakers in the great web of derivatives trading encircling the globe. Shifting the products, and the risk of default, off the books of the banks and onto these middlemen would ensure that no single bank was too interconnected to fail, the rationale goes.

The banks, for their part, sense a threat to the billions of dollars in profits they earn each year from trading in these complex derivatives.

EIA Weekly Petroleum Status Report

• Total motor gasoline stocks ↓2.9 million barrels last week, vs. ↑0.2 million expected, with the draw focused on the Midwest and Gulf Coast
• Distillate demand was also bullish: stocks ↓2.2 million barrels vs. ↓0.9 million barrels expectedProduct cracks have traded within a $0.40 range this morning and are now stronger: Apr10 RBOB is ↑$0.43 while HO is ↑$0.37
• Yesterday's API report showing a 6.5 million barrel rise in crude oil inventories failed to materialize, EIA showed crude stocks ↑1.4 million bbl
• Refineries decreased use of crude oil by 149,000 bpd last week, reducing percent utilization by 1.2% to 80.7%

EIA Weekly Petroleum Status Report: Talking Points

• Crude oil stocks ↑4.1 million barrels, 2.7 million more than analysts predicted, but WTI bounced back after trading lower on the news
• Heat cracks reversed early gains after the stocks drew by 900,000 barrels, in line with expectations: Apr10 is now ↓$0.03 to $6.64
• Gasoline stocks built by 700,000 barrels, vs. 600,000 build expected, though the Apr10 crack reacted by ↑$0.38 to $12.96
• Oil stocks at Cushing, OK rose by 100,000 barrels, the first build since January 1
• Crude oil inputs by refineries fell by 33,000 bpd last week as refineries suppress utilization in response to weak Distillate cracks

Consumer Hedge Tear Sheet: March 1st