Retracement and Consolidation

Energy markets yesterday gave back most of the gains from Wednesday's session as larger than expected demand destruction in OECD nations looks to have trumped concerns over non-Opec supplies. Inventory data throughout the developed world continues to remain at record low levels, possibly preventing a continuation of the sharp move lower we have been witnessing.
Crude prices at levels $30 below the highs do not appear to have renewed demand growth.

Instead, with markets expected by many to continue consolidaing around $110, current levels look like an excellent opportunity to adjust consumer hedges ahead of a potential move higher in 2009. With this in mind, the 1st half of 2009 $130 / 170 call spread can be owned for Zero Cost by selling the $95.50 put in the same time frame. This trade allows a full $40 of upside protection for every month from January to June of 2009. the protection is paid for by selling the $95.50 put, $20 below the current flat price.

Consumer Hedges in Focus after Bullish Data Release

Energy markets rallied yesterday following bullish U.S. inventory data showing a decline in crude stocks of 400,000 barrels. The surprise drop is indicative of the impact of hurricanes in the fragile Gulf region, as much of the blame for the declining stocks is placed on tropical storm Edouard for disrupting imports. US refiners have also been producing less product as their margins continue to shrink; maintenance programs are expected to continue well into autumn of this year. The end result was a rally of more than $4 in front-month WTI crude.

Upside consumer hedge strategies continue to remain cheap, as hedge funds and short-term traders focus on the 200-day moving average lurking on the downside. Protection from further moves higher can be found in the January through June $130 / 140 call spread for $2.40. For an average price of only $2,400 per month, this trade pays $7,600 of upside protection. The hedge can be mated with the $83 put to make the entire trade zero cost, thus providing $10,000 of upside protection.

Bullish gasoline stats/weather push market higher

A surprise gasoline draw helped push the market higher today, yet product cracks were not overly bullish. Crude was up as high as $117.46 by midday and those who took advantage of low cost options strategies and short covers rejoiced. There is some model information pointing to weather risk coming out in the next week or two, which contributed to the NG rally that subsided late in the day (NG up only 15 cents). This weather may also affect crude supply, so be advised.

Call strategies still remain our recommendation for hedgers that remain low on inventory. The September American/Euro style crude options will expire next Wednesday, so look to the September Asian or October American/Euro for near term hedges. Volatility is still firm.

Longer term, the Q4 120-140 Asian WTI call spread is offered at $4.00. This still looks like a good buying opportunity.

NY: CT (3PM EST)

A Fresh Look for Consumer Hedges

A second day of consolidation around the $115 level served to decrease implied volatility in the energy markets yesterday. Competing forces continue to pull the market in two directions: crude and product inventories throughout the developed world remain dangerously low and a recent IEA report cited inventories in the second quarter of 2008 grew at their slowest rate in more than a quarter century. The report also found that while demand appears to be easing heading into 2009, there will be a "renewed tightening thereafter". The U.S. Gulf hurricane season remains on many trader's radar, as a newly formed tropical storm has yet to determine its path through the oil-rich locale.

Long-term upside hedges are consequently getting renewed attention as of late. The 1st Half of 2009 $125/140 call spread strip in WTI has been trading around $3.50. For total risk of only $3,500 per month, this trade enables the consumer hedger to enjoy $15 of protection from January through June of 2009 should the market rally back towards $140.
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Decreased Volatility results in Cheaper Consumer Hedging Strategies

Crude oil prices consolidated around the $115 level yesterday despite escalating fighting between Russia and Georgia amidst the oil-rich Caspian region. Possibly below the radar now are increased tensions between Iran and the West over the Middle-Eastern county's nuclear program. Hedge fund short crude positions appear to be both driving the market lower and preventing any sort of rebound. However, with a drop of more than 20% in one month's time, hedger's have been focusing on locking in the current price, whether it be a South American producer buying downside protection or an Asian airline recognizing the need to protect against a possible move higher in the second half of the year.

Option premiums are becoming cheaper as the market adjusts to the $110-120 price range. The October $125 calls are now trading around $3.30, providing unlimited upside protection for the next month if prices rebound. A maximum investment of only $3,300 protects against the many risks we see prevalent in the market today: political, military, weather, and supply and demand.

Commodity sell-off bifurcates

We have witnessed a broad commodity sell-off over the last month, which has potentially hit a crossroad. US dollar strength has put pressure on gold and petroleum, and metals demand in is clearly weak in general due to industrial production. However, we see petroleum with substantial upside risk. News regarding the former Soviet states self-organizing to rally behind Georgia is one piece of bullish news that helped bring the market back to $115 from a low of $112.72 today. To protect upside risk, consider the September WTI Asian 120-130 call spread for $2.50 / bbl - a $10 wide payment with good leverage. To achieve a lower cost, the 130-140 call spread costs $1.25/bbl. In the event of a market surprise on the supply side, this would provide excellent protection. Also to note: back month crude volatility has been steeply discounted. Consumer hedgers looking for longer term protection have an improved cost profile.

Traders Speculate if Price Drop is Overdone

Energy markets plummeted and the U.S. Dollar rallied in trading on Friday as hedge funds continue to exit short dollar/long crude positions. With tensions between Iran and the West worsening, an actual war going on between Russia and Georgia, militant strikes in Nigeria increasing again, and a U.S. Gulf hurricane season that can still bare its teeth, the drop in prices is starting to look overdone. Just as with the move on the upside to $147, this downward push appears to have exceeded its mark and a correction may be upcoming.

Hedgers looking to lock in prices at the lowest levels we've seen in months have been pricing the October through January $120 price cap against the $113 price floor. This trade enables the owner to have oil prices capped at $120 for the remainder of the 2008 calendar year while putting a price floor in at $113. The trade requires Zero Premium, and as such there is no option decay associated with the hedge.