Geopolitical Tensions Back in Focus

Geopolitical tensions continue to put upward pressure on energy markets as Feb09 WTI and Brent crude both rallied closer to the $50 level. Renewed militant attacks in Nigeria on Eni operated pipelines come as the Israeli/Gaza conflict looks set to worsen. Meanwhile, Russian and Ukraine have yet to settle their Natural Gas spat as the EU looks into possible siphoning off of gas by the latter country. Further evidence of Opec supply cuts are evident in the tightening of the Brent/Dubai EFS, now at its narrowest level in eight years. The heavy, sour crude of the Dubai Middle East contract is a superior indicator than that of Western benchmarks such as WTI or Brent in the short-term regarding any production cuts by regional producers.

Cheap, near-term upside protection still remains in the Q109 WTI $60/75 call spread strip. Trading around only $2,000 per 1000 barrels per month, this consumer strategy offers total protection of $39,000 with only $6000 at risk. The strip can even be made Costless by selling the $46 put in the same tenor. With the Q109 calendar strip trading above $52.50, the Zero-Cost strategy provides an average downside buffer of about $6.50.

Singapore, 09:00

New Year Rally keeps volatility high

Following late 2008 inventory reduction strategies and a general bearish sentiment, it is not hard to believe a correction or bounce was due. The Israeli confrontations with Hamas in Gaza were more than enough news to help the market sustain a rally. Now we are seeing plenty of upside hedges coming in, taking advantage of put skew (calls cheaper in comparison, and selling puts to finance appears a good tradeoff).

Volatility remains high by historic standards in the low 90s (%). The high level of volatility still provides a good opportunity to those who can use a 3 way strategy (selling 1 option net) to achieve low cost hedges. One such idea is to buy a call spread and sell a put such as the WTI Q1 62-72 call spread versus the $40 put for zero cost. The current swap reference for Q1 is $52. This is more of an insurance trade but accepts a $40 floor, which is near the marginal cost for many producers outside the Middle East (such as Canada).

Please call or email for current information or stratgies.

New York 415pm

Focus on Opec

Crude markets finished last week on a soft note with February 2009 WTI trading in a relatively tight $2 band before ending the day at just over $42.00. While weak consumer demand, directly related to the continuing global economic downturn, dominates the derivatives markets, traders and analysts will be closely watching physical crude leaving Opec ports over the next few months. The pressure is on the cartel to deliver on its promised cuts; any lack of adherence to its own mandates will result in a prolonged recovery period for energy futures.

Consumer hedgers can look to the recent drop in implied volatility to secure cheap upside protection for the upcoming calendar year. The Cal09 WTI $60/$80 call spread strip is trading around $3,500 per 1000 barrels per month or it can be purchased for Zero Cost by selling the $41 put in the same tenor. The Cal09 underlying swap strip is currently trading above $51.00.

Singapore, 11:00

Crude Markets Volatile after Opec Cut

Light-sweet crude oil prices drifted lower yet again yesterday, with February 2009 WTI currently offered just above $42. While Opec's supply cuts were answered by the market with a sharp move lower, it was the heavy sour crudes that may have reached at least a temporary bottom. It is the production of this type of crude that will be most affected by the cartel's recent severe production cuts. Lower quality Dubai crude actually rose slightly yesterday.

With the global economic slowdown expected to continue to weigh heavily on consumer demand for much of 2009, downside producer protection strategies remain the focus of many traders. Implied volatilities have also recently relaxed, allowing for relatively cheaper option premiums. Using Asian-style options, the 1H09 WTI $30 puts are currently trading around $1,100 per 1000 barrels per month. By selling the $70 call in the same tenor, the puts can be made Costless (the resulting position would be the 1H09 $30/$70 Costless Collar). With the 1H09 swap trading under $48, this hedge would not produce losses at expiration without front-month prices moving up more than $22.

Singapore, 08:30

Volatility Reigns Ahead of Opec Meeting

Energy markets yesterday experienced a continuation of the recent high volatility as front-month WTI crude oil broke through the psychological $50 level only to end the day lower ($6 range). Wednesday's upcoming Opec meeting has put a temporary floor under prices as traders await news on the producer group's latest cuts. The question of whether or not to announce further cuts has already been answered; what remains is just how much will be announced and then followed-through on in subsequent months. Adding pressure to Opec is the increasing floating storage among physical traders and oil companies. The strategy of buying cheap surplus oil and selling back-dated futures along the contango curve has allowed some to lock in returns for 2009.

Implied volatility continues to hold strong, resulting in sharp P/L's for those hedging with swaps and relatively inflated premiums for those using options. The most basic and safest strategies for locking in protection at year-end often involve vertical spread strips. An example of short-term producer protection would be the WTI 1H09 $30/40 put spread strip using Asian-style options, currently offered at $2,000 per 1000 barrels per month. The strip can be made zero-cost by selling the $65 call in the same tenor.

Singapore, 09:00

Energy Prices Drop on Auto Sector Bail-Out Failure

Crude oil prices backed off recent highs after the US Senate caught many traders off-guard by rejecting the proposed $14 billion bail-out plan. Opec's upcoming meeting as well as the expected production cuts of approximately 2-2.5M had been priced into the market when news of the auto bail-out failure broke. With global oil demand expected to continue falling through much of 2009, the pressure is on the cartel as well as non-Opec producers such as Russia to remove excess production from the market. Producer nations are facing the continuing pressure of a double revenue hit, from both falling demand and plummeting prices.

Short and medium-term vertical put spreads using WTI options allow for easy entry and exit (deep liquidity) as well as no counterparty risk (NYMEX clearing). The 1H09 $20/30 put spread is trading at only $700 per 1000 barrels per month. This producer hedge allows for total protection of $9,300 per month with only $700 at risk.

Singapore, 21:00

Opec Expectations Push Crude Higher & Implied Vols Lower

Energy prices surged yesterday as a series of bullish announcements, although none too surprising, served to cast doubt on recent 4-year lows in the crude oil market. The International Energy Agency contributed to traders expectations of a large production cut from Opec, by stating world oil demand would drop in 2008 and then again in 2009. Adding to the bullish pressure was the news that Russia would collaborate with Opec at the cartel's upcoming meeting in Algeria. Many traders are expecting the producer nation to contribute a cut of approximately 500,000 barrels per day on top of the 1.5 - 2.5M cut many expect to see from Opec.

The resurgent underlying WTI price served to decrease implied volatility, resulting in relatively cheaper option premiums. Producer bargain hunters looking to protect against further price drops in the first half of 2009 are looking at the 1H09 $30/45 put spread strip, currently trading around $3,300 per 1000 barrels per month using Asian-style options. This put spread strip can be purchased for zero premium by selling the $68 call in the same tenor. With the 1H09 underlying calendar strip trading around $54, this zero cost strategy contains no risk below $68 (a buffer of $14).

Singapore, 07:00