Despite higher crude oil prices, we notice that inventories in crude oil and distillates (including jet) remain very high. Distillates, in particular, are at the highest level we have seen in years.
There are two potential scenarios here for timing your jet fuel hedges for the remainder of 2009 and even 2010.
1) Crude could fall as inventories continue to be high and production cuts from OPEC are offset by non-OPEC countries. This assumes demand is flat to down. In this case, it is likely the front months that fall most, leaving 2010 reasonably high. Our recommendation is to avoid crude oil swaps in the near term.
2) Heating oil and jet-kero could fall independently (reducing the distillate crack spread) as inventories remain high and demand remains sluggish. We are more convinced this second scenario is likely given what we see in inventory and street indications of weak demand. In this case, heating oil options will be well valued for consumers looking to lock in a lower crack spread for the remainder of the year.
Finally, if you are looking to get some portion of hedges on sooner, consider a heating oil call spread for the balance of 2009. For example, the second half Asian style $1.60-2.00 Call spread is offered for 12.5 cpg. This offers excellent upside protection at a reasonable price and has no downside risk if the market tumbles.
In 2010, the heat crack is also reasonably valued by historic standards at approximately $8.90 per barrel (offer). While we normally suggest that longer term hedges are best using crude oil options, using heat through 2010 does not pose too much of a cost challenge.
Please call or email if there is a particular strategy you would like to review or price.
New York, 17h00 - 4/16/09
Thursday, April 16, 2009
Tuesday, March 31, 2009
Energy Price Action, Singapore Jetkero
Energy markets bounced back yesterday but reaffirmed $50 in WTI as a new level of resistance after that same price point failed to provide support during Monday's sharp retracement lower. Despite the rally, the broad contango structure remains in place across most markets. Expectations of further crude inventory builds to be announced tonight (following the pattern we've seen as of late) are mostly to blame for the resilience of the contango futures curve.
Not surprisingly, product margins on average were weaker on the rally, as we expected the lack of demand for most of these products to be a main catalyst in front-month market weakness. California Jetfuel differentials however held firm throughout the WTI rally and traders can expect to see follow-through to the upside in the Sing Jetkero contract today (barring a subsequent dump in WTI/Brent during early Asian hours. Implied volatility also increased for the second day yesterday, further highlighting questions as to whether Sing Jetkero has dropped back down into its most recent trading band.
Consumer hedgers looking to the second half of the year for protection can take a breather from the current volatility by locking in a wide collar. With the 2H09 Sing Jetkero Calendar Swap currently trading around $63, a price ceiling (call option) at $80 can be owned for zero premium by accepting a price floor (put option) at $52. This type of hedge typically will have much less mark-to-market volatility than simply buying swaps, in other words if the underlying continues to drop, margin calls should be comparatively less painful.
Singapore, 08:00
Not surprisingly, product margins on average were weaker on the rally, as we expected the lack of demand for most of these products to be a main catalyst in front-month market weakness. California Jetfuel differentials however held firm throughout the WTI rally and traders can expect to see follow-through to the upside in the Sing Jetkero contract today (barring a subsequent dump in WTI/Brent during early Asian hours. Implied volatility also increased for the second day yesterday, further highlighting questions as to whether Sing Jetkero has dropped back down into its most recent trading band.
Consumer hedgers looking to the second half of the year for protection can take a breather from the current volatility by locking in a wide collar. With the 2H09 Sing Jetkero Calendar Swap currently trading around $63, a price ceiling (call option) at $80 can be owned for zero premium by accepting a price floor (put option) at $52. This type of hedge typically will have much less mark-to-market volatility than simply buying swaps, in other words if the underlying continues to drop, margin calls should be comparatively less painful.
Singapore, 08:00
Monday, March 30, 2009
Focus Turns to the Downside
The rally in oil markets has proven to be short-lived as commodities followed equities lower on the back of further talk of bankruptcy for US auto makers General Motors and Chrysler. Curiously, the crude futures curve remained intact for the most part, leaving the recent broadening of the contango structure in place. The Dow pushing back towards 7000 paired with crude inventories at levels not seen since 1993 simply proved too much for the recent rally, and attention has once again turned to the downside.
Many traders see refined products as having led the way lower and refinery margins remained basically unchanged throughout yesterday’s market rout. It has been no secret that industrial fuel demand has been much harder hit than gasoline as a result of the current economic crisis. Oil products used to fuel power generation, transportation and industry have seen a relative collapse in demand. Singapore Fuel Oil backed off recent highs, and just as with crude oil, the product is trading back below support levels. Expect further downward pressure as implied volatility has increased, thus indicating a renewed focus by traders to the downside.
Option strategies can be used to hedge against any downside risk while providing for breathing room on the upside, thus decreasing and limiting painful margin calls. For instance, the Sing Fuel Oil 180 May09 $220/250 put spread can be owned for $12/MT. The max possible loss on this hedge is the total premium paid for it ($12), and it provides protection down to $220. The put spread can be owned for Zero Cost by selling the $298 call in the same tenor. With the underlying swap trading around $261, this zero cost strategy provides $30 of downside protection with $37 of breathing room on the upside.
Singapore, 09:00
Many traders see refined products as having led the way lower and refinery margins remained basically unchanged throughout yesterday’s market rout. It has been no secret that industrial fuel demand has been much harder hit than gasoline as a result of the current economic crisis. Oil products used to fuel power generation, transportation and industry have seen a relative collapse in demand. Singapore Fuel Oil backed off recent highs, and just as with crude oil, the product is trading back below support levels. Expect further downward pressure as implied volatility has increased, thus indicating a renewed focus by traders to the downside.
Option strategies can be used to hedge against any downside risk while providing for breathing room on the upside, thus decreasing and limiting painful margin calls. For instance, the Sing Fuel Oil 180 May09 $220/250 put spread can be owned for $12/MT. The max possible loss on this hedge is the total premium paid for it ($12), and it provides protection down to $220. The put spread can be owned for Zero Cost by selling the $298 call in the same tenor. With the underlying swap trading around $261, this zero cost strategy provides $30 of downside protection with $37 of breathing room on the upside.
Singapore, 09:00
Sunday, March 29, 2009
Production & Storage Data
Bearish news grabbed the headlines and pulled energy markets lower on Friday as front-month WTI dropped almost $2.00 and settled close to the critical $50 support level. Late-day selling of US equities combined with a resurgent Dollar to weaken the recent bullish sentiment. Traders set their sights once again on Opec, as it was announced in a report by Petrologistics that the producer cartel’s output remains 1M bbls/day over announced targets. Tanker tracker Oil Movements reported a sharp decline in oil exports from the cartel (excluding Angola and Ecuador), specifically a drop in crude oil exports to a level not seen since June 2003. This apparent uncertainty in actual production on a daily or weekly basis is one factor contributing to the still high level of implied volatility in oil markets.
Friday’s drop in prices has exacerbated the market contango structure, making it increasingly likely that floating storage will begin to increase yet again. Eight VLCC’s were employed to hold approximately 16M total barrels of Forties crude less than two months ago. That number has since dwindled to about three but may increase on the back of a renewed contango curve.
The currently high crude inventory levels are expected to dissipate in the second half of 2009, which along with the re-purchase of inventory hedges and a possibly weaker Dollar, is expected to lead to a sustained rally in commodity prices. Traders can look to take advantage of front-month WTI possibly testing the $50 support level as well as December 2009 rallying towards $70. Using American-style options, the WTI May $50 puts are trading around $2,200 per 1,000 barrels while the December $60/75 call spread can be owned for Zero Premium by selling the $48.50 put.
Singapore, 08:00
Friday’s drop in prices has exacerbated the market contango structure, making it increasingly likely that floating storage will begin to increase yet again. Eight VLCC’s were employed to hold approximately 16M total barrels of Forties crude less than two months ago. That number has since dwindled to about three but may increase on the back of a renewed contango curve.
The currently high crude inventory levels are expected to dissipate in the second half of 2009, which along with the re-purchase of inventory hedges and a possibly weaker Dollar, is expected to lead to a sustained rally in commodity prices. Traders can look to take advantage of front-month WTI possibly testing the $50 support level as well as December 2009 rallying towards $70. Using American-style options, the WTI May $50 puts are trading around $2,200 per 1,000 barrels while the December $60/75 call spread can be owned for Zero Premium by selling the $48.50 put.
Singapore, 08:00
Wednesday, March 25, 2009
Inventory Reaction and Sing Jetkero Hedging
Energy markets held firm in the face of bearish inventory data yesterday as crude stocks in the United States were reported to have reached levels not seen since 1993. WTI and Brent both softened on the day but support remains fixed at the $50level. In short, the longer the market can remain above this price point, the weaker any retracement below it should prove to be. The reported draw in Distillates can be traced to an increase in demand from continental Europe, but so long as crude is able to hold above $50, expect Products markets to remain firm as well. As expected, California Jet Fuel experienced a late day rally and so
Distillate traders in Singapore should be on guard for any type of follow-through.
Implied volatility softened slightly in the Products yesterday as the market appears to be range bound and unable to break out firmly to either the upside or downside. Hedgers with near-term exposure to further upside moves in Sing Jetkero can look to lock in protection in the form of the April-Sept09 $70/90 call spread for only $3.00/barrel. The premium required for the call spread can be cut in half by accepting a price floor (short put) at $53.00.
Singapore, 09:00
Distillate traders in Singapore should be on guard for any type of follow-through.
Implied volatility softened slightly in the Products yesterday as the market appears to be range bound and unable to break out firmly to either the upside or downside. Hedgers with near-term exposure to further upside moves in Sing Jetkero can look to lock in protection in the form of the April-Sept09 $70/90 call spread for only $3.00/barrel. The premium required for the call spread can be cut in half by accepting a price floor (short put) at $53.00.
Singapore, 09:00
Monday, March 23, 2009
Reaction to The Treasury's Plan and Fuel Oil Hedges
A quick note that Jonathan Kornafel, HCEnergy's Director of Asia will be speaking at the 6th Annual China Derivatives Summit in Shanghai on the topic of “Energy Market Volatility and Hedging & Trading Strategies” this Wednesday.
Commodity and equity markets in the West rose sharply yesterday after the US Treasury’s bad debt plan received a positive reception. Markets were thin however, as many traders were attending the annual NPRA conference in Texas. The link between oil and equities is important to note, as it serves to highlight the lack of fundamentals currently driving the market. The Treasury’s plan was greeted with approval for its size and scope, fundamentally a result of the absolute depths to which the global economy and demand have plunged. Any inflation/weak Dollar-induced rally needs to be taken with a grain of salt, as these issues will not confront the market for at least several quarters, most likely a year. There are however, a number of bullish supply-side issues currently demanding attention, such as the nationwide oilworkers strike in Brazil which is expected to immediately affect both Gasoline and Fuel Oil output, as well as a threatened three day strike of Nigerian oil workers.
While the Brazilian strike may add a short-term cushion to Fuel Oil prices, expect the products market to be the main catalyst to pull feedstock markets lower. Both California Diesel and Jet fuel differentials came under pressure yesterday during the rally. Singapore Fuel Oil is currently trading back up near the top of the range first established in late November 2008. This represents an excellent opportunity for producer hedgers to lock in solid downside protection that hasn’t been available for more than a month. The Sing Fuel Oil Q209 $245 price floor (put) is currently offered around $20.00 per MT and can be owned for zero cost by accepting a Q209 price ceiling (call) at $288. Physical traders currently long product and not fully hedged can sell upside calls to help defray added costs. The April Sing FO $280 calls are currently bid around $50,000 per 5000MT and expire on the last trading day of April.
Singapore, 09:00
Commodity and equity markets in the West rose sharply yesterday after the US Treasury’s bad debt plan received a positive reception. Markets were thin however, as many traders were attending the annual NPRA conference in Texas. The link between oil and equities is important to note, as it serves to highlight the lack of fundamentals currently driving the market. The Treasury’s plan was greeted with approval for its size and scope, fundamentally a result of the absolute depths to which the global economy and demand have plunged. Any inflation/weak Dollar-induced rally needs to be taken with a grain of salt, as these issues will not confront the market for at least several quarters, most likely a year. There are however, a number of bullish supply-side issues currently demanding attention, such as the nationwide oilworkers strike in Brazil which is expected to immediately affect both Gasoline and Fuel Oil output, as well as a threatened three day strike of Nigerian oil workers.
While the Brazilian strike may add a short-term cushion to Fuel Oil prices, expect the products market to be the main catalyst to pull feedstock markets lower. Both California Diesel and Jet fuel differentials came under pressure yesterday during the rally. Singapore Fuel Oil is currently trading back up near the top of the range first established in late November 2008. This represents an excellent opportunity for producer hedgers to lock in solid downside protection that hasn’t been available for more than a month. The Sing Fuel Oil Q209 $245 price floor (put) is currently offered around $20.00 per MT and can be owned for zero cost by accepting a Q209 price ceiling (call) at $288. Physical traders currently long product and not fully hedged can sell upside calls to help defray added costs. The April Sing FO $280 calls are currently bid around $50,000 per 5000MT and expire on the last trading day of April.
Singapore, 09:00
Wednesday, March 18, 2009
Sing JetKero
Energy markets continued their renewed push higher yesterday on the back of calls from Opec to increase compliance with already announced production cuts. WTI has now set a 3-month high in the push towards key resistance at the $50 level. Many traders have been caught off-guard with this post-Opec announcement rally and are looking for futures to turn within the week back towards $40. This prediction became all the more relevant yesterday as the API inventory numbers in the US came out overwhelmingly bearish.
Cracks showed considerable strength on top of the strong run-up in crude prices. California Jet Fuel differentials gained substantially, as did Nymex Heating Oil which is often used as a proxy by Airlines for hedging purposes. Singapore Jetkero and Distillate traders should be on the look-out for a near-term drive higher, while also guarding against the possibility that energy markets may turn and push lower. The Sing Jetkero 2Q09 $65 price cap (call strip) can now be owned for $1,500 per 1000bbls/month. Hedgers looking to offset half of the premium for this price cap while retaining some room for error on the downside can sell the $43.50 price floor (put strip) in the same tenor- resulting in a price cap premium of only $750. With the 2Q09 Calendar Swap currently trading around $55.00 this hedge results in breathing room of more than $11.50 on the downside, or more than six standard deviations.
Singapore, 09:00
Cracks showed considerable strength on top of the strong run-up in crude prices. California Jet Fuel differentials gained substantially, as did Nymex Heating Oil which is often used as a proxy by Airlines for hedging purposes. Singapore Jetkero and Distillate traders should be on the look-out for a near-term drive higher, while also guarding against the possibility that energy markets may turn and push lower. The Sing Jetkero 2Q09 $65 price cap (call strip) can now be owned for $1,500 per 1000bbls/month. Hedgers looking to offset half of the premium for this price cap while retaining some room for error on the downside can sell the $43.50 price floor (put strip) in the same tenor- resulting in a price cap premium of only $750. With the 2Q09 Calendar Swap currently trading around $55.00 this hedge results in breathing room of more than $11.50 on the downside, or more than six standard deviations.
Singapore, 09:00
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